Canadian Retail Markets Study

A Review of Competitiveness in the Canadian Refined Petroleum Marketing Industry
Prepared For: Industry Canada Natural Resources Canada Canadian Petroleum Products Institute

September 15, 1997
Suite 413, 1333 - 8th Street SW Calgary AB T2R 1M6 Canada 403-283-8704

Table of Contents
List of Figures _____________________________________________________ i List of Tables ______________________________________________________ ii Executive Summary _______________________________________________ iii Introduction _______________________________________________________ 1 Background Study Overview Report Format and Conventions Acknowledgments An Overview of the Model Competitiveness: The Pump Price Model in Motion Canada’s Petroleum Industry: Upstream and Downstream Upstream Industry Petroleum Refining Petroleum Marketing Taxation on Petroleum Products Pump Price/Margin Model: An Integrated View Marketing Sector Overview Competitiveness in the Retail Gasoline Sub-Sector Retail Gasoline Demand National Retail Petroleum Outlet Representation Retail Petroleum Outlet Modes Outlet Throughput Ancillary Services Gasoline and the Consumer Price Index Key Price History Margin History Canada vs. US Price History Rack Price History Demand vs. Price History 1 2 2 2 4 5 7 8 9 12 14 16 17 19 23 24 25 28 29 30 31 32 34 35 36

Part A Pump Price/Margin Model ____________________________________ 4

Part B The Structure of the Retail Petroleum Products Sub-Sector ________ 16

Part C Historical Trend Analysis ____________________________________ 30

Part D Selected Markets Study ______________________________________ 38

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Introduction Methodology Study Market Findings Market by Market Competitive Analysis Findings Conclusions Recommendations

38 38 42 52 72 74 80

Part E Findings, Conclusions & Recommendations _____________________ 72

Appendices _______________________________________________________ 82 I Glossary of Terms________________________________________________ 83 II Source Data Tables ______________________________________________ 85 Table A: CPI Index: Selected Goods and Services Table B: Key Price / Margin History - Regular Gasoline Table C: Canadian Supply, Inventory, Demand, and Pump/Rack Prices Table D: Pump Price History - Study Markets Table D: Pump Price History - Study Markets (cont’d) Table E: Ex-tax Pump Price History - Study Markets Table E: Ex-tax Pump Price History - Study Markets (cont’d) Table F: Rack Prices - Study Markets Table F: Rack Prices - Study Markets (cont’d) Table G: Study Market Data - Throughput and Price by Grade Table H: Study Market Data - Rack Price, Tax (by Grade) Table J: Study Market Data - Blended Prices, Costs, Margin Table K: Study Market Data - Sales, Revenue, Outlet Costs, Income Table L: Study Market Data - Demographic Profiles 85 86 88 90 91 92 93 94 95 96 97 98 99 100

III Sources of Information about the Downstream Petroleum Industry____ 101

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............................................................................................................................... 53 Figure 28: Vancouver .........................Selected Centres ....................................................................................... 48 Figure 25: Outlet / Volume Relationship ..Price History .....................................................................8¢ Pump Price) ....................................................Price History................................................. 29 Figure 9: Annual Gasoline Price (Cents per Litre) ............................ 43 Figure 20: Ex-Tax Pump Price Elements ......................................Selected Goods & Services ...........................................Price History ......................................................................... 30 Figure 10: CPI Index Comparison ........ 44 Figure 21: Gross Marketing Margin Elements .............................................................................................................................................................. 54 Figure 29: Calgary ......Regular Unleaded ........................... 28 Figure 8: Outlet Representation by Service ............................ 50 Figure 27: Victoria ................................................ Pump Price (nominal ¢/litre)......................Price History ... 57 Figure 31: Winnipeg ................................................... 33 Figure 13: Monthly Gross Marketing Margins......................................................................... 34 Figure 14: Canada / US Monthly Pump Price (Nominal $) ..................... 42 Figure 19: Pump Price ....................Price History.................................................................... ex-tax elements .......................................................... 40 Figure 18: 1995 Average "Blended" Pump Price .......... 71 MJ ERVIN & ASSOCIATES i ............................................................................................................................................ 62 Figure 33: Ottawa ......................................... 58 Figure 32: Toronto .................................................Price History.............................. 66 Figure 35: Saint John NB ..........................Price History ...1988-1995 ............................... 49 Figure 26: Outlet Revenues........................ 32 Figure 12: Monthly Margins 1991-1996 (Nominal $)............................................................. 63 Figure 34: Montreal ..................Price History........................................................................................ 69 Figure 36: Halifax ................... 34 Figure 15: Monthly Rack Prices: Selected Markets ............................ 18 Figure 4: 1995 Refined Petroleum Products Demand by Product Category.......................................................................................................... 24 Figure 6: 1995 Retail Outlets by Province ......................................... 56 Figure 30: Regina ............................................. 4 Figure 2: 1996 Average Prices/Margins ....................................................... Income.............................................Price History ....................... Costs....................................... Gross Product Margin ............................................................................................. 31 Figure 11: Monthly Prices 1990-1996 (Nominal $) .......................... 36 Figure 17: Study Market Methodology ....... 70 Figure 37: Charlottetown ...........................Regional & Urban Groupings...... 46 Figure 23: Average Annual Throughput per Outlet..................................... 35 Figure 16: Monthly Demand vs...........tax............................ 24 Figure 5: Canadian Retail Outlet Population ................................List of Figures Figure 1: Pump Price / Margin Model........................................................Price History.. 45 Figure 22: Petroleum Gross Product Margins ................................................ 25 Figure 7: Outlet Representation by Mode...Price History .............. 16 Figure 3: 1996 Average Regular Gasoline Margins (56............... 47 Figure 24: Outlet Volume vs....................

.......................... 15 Table 3: Selected Study Markets ........................... 13 Table 2: Taxes on Regular Gasoline on December 31............ 1996 .......................... 51 MJ ERVIN & ASSOCIATES ii .................. 39 Table 4: Estimated Cash Flow from Consolidated Net Revenue.....................List of Tables Table 1: Downstream Sales Channels .........................................................................................................................................

supplier costs and profitability.4 ¢ 19.5 cents per litre on the sale of regular gasoline in a typical major urban market. represented by crude.3 ¢ 28. 1996 Average Prices and Margins . Price competition occurs at three distinct levels in this industry.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3.Regular Gasoline 10 City Average NOT TO SCALE PUMP PRICE 56.2 ¢ 24. the Canadian retail marketing sector realized an average gross product margin of 3. and the Canadian Petroleum Products Institute (CPPI). Natural Resources Canada (NRCan). The model also illustrates that each sector margin is defined by the price at which feedstock or wholesale product is bought and then sold. These prices are determined in a competitive marketplace. This Retail Petroleum Markets study provides a practical tool for understanding the dynamics of this vital and complex industry.5 ¢ 0. each with unique MJ ERVIN & ASSOCIATES iii . forms a comprehensive overview of the competitiveness of the downstream petroleum industry in Canada. This margin represents gross income (after wholesale product cost and freight costs) available to provide for retail marketing operations including outlet costs. together with a separate review of the refining sector.8 ¢ TAX 28. dealer income.1 ¢ 5. This study. and a foundation for effective policy development. Pump Price/Margin Model The study presents a model which serves to illustrate the interrelationships between the many stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. rack. and ex-tax pump prices.Executive Summary Study Objectives The Canadian Retail Petroleum Markets Study is a joint initiative of Industry Canada.3 ¢ CRUDE PRICE source: Natural Resources Canada The model shows that in 1996.

dynamics. Historical Trends Changes in the average gasoline prices in Canada have remained at or below the “All Items” Consumer Price Index (CPI). The Structure of the Retail Petroleum Products Industry Retail petroleum marketing is typified by the retail “gas station” outlet. encompassing several marketing channels which provide a range of petroleum products to industrial and domestic consumers. Annual Gasoline Price in Cents per Litre 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 Source: Natural Resources Canada (Nominal $). and declined by 10 cents per litre measured in constant dollars. Dealers have a variety of relationships with their supplier. The resultant margins are therefore a reflection of the state of product supply. and accordingly. due to its prominence in the public and media domain. and the traditional automotive service bay. well over half of all outlets in Canada operate as lessees or independents. ex-tax pump prices declined by 4 cents per litre measured in nominal dollars. Ancillary or non-petroleum revenue is an increasingly important feature of the retail gasoline marketing industry. Convenience store. While each of these marketing channels operates in a competitive environment. Statistics Canada (Constant $) MJ ERVIN & ASSOCIATES iv . the responsibility for deciding upon retail pump prices resides principally at the local dealer level. which potentially allow for reduced margins at the gasoline pump. From 1986 to 1995. demand and other competitive factors existing at the time.000 in 1989.500 retail outlets were in operation in Canada in 1995. nine of the past ten years. this study focuses on the retail gasoline sector. car wash. Approximately 16. are examples of ways in which outlet petroleum sales are augmented by other revenues. compared to about 22. The Canadian retail gasoline marketing sector is but one element of a much larger industry infrastructure.

MJ ERVIN & ASSOCIATES v .The “tax-included” nominal pump price increased over this same period. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . From 1991 to 1996.crude) 5¢ Marketing Margin (retail . both refiners and marketers have experienced a decline in margins as a result of price competition at the rack and at the retail pump. while (average) combined gross refiner and gross marketing margins decreased by about 7 cents per litre. Monthly Margins in Nominal Cents per Litre 30¢ Tax Content 25¢ 20¢ Canada Avg. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. and has been a result of several factors including: • • • improved refinery utilization and efficiency. Canadian average ex-tax pump prices in major markets have been virtually identical to those of the United States since mid-1994.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Despite an upwards trend in world crude prices since 1991. This has both resulted in. and emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. As a result of these trends. improved retail outlet sales performance as a consequence of retail outlet rationalizations and demand increases. however. as a consequence of refinery plant rationalization (closures) and a modest demand increase.

a distinct pattern was demonstrated: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market. A wide range of petroleum gross product margins were evident. rural markets. MJ ERVIN & ASSOCIATES vi . in order to identify market and/or regional competitive differences as potential issues or opportunities within the industry. This provided for market-bymarket and regional comparisons of key competitiveness indicators. to derive 1995 average petroleum gross product margins for each of the 19 markets. proprietary 1995 operating data were collected on a total of 481 retail outlets in the selected market groups. were selected for a detailed review of outlet economics. wholesale product cost and freight charges) were isolated from the pump price. and one by one. With few exceptions. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. although this study provides an independent confirmation of this. the 19 study markets exhibited a high degree of correlation in gross product margin as a function of outlet throughput. several “outside variables” (product taxes. This was integrated with selected NRCan price data. With the participation of several CPPI member companies. US Monthly Pump Prices 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada Selected Markets Study As part of this study. That such a relationship should exist was not surprising.Comparison of Canada. When petroleum gross product margins were compared to their corresponding outlet throughputs. 19 markets representing a broad range of conditions. but also had significantly higher throughputs per outlet. which led to two key findings: • Larger population centres and their surrounding communities consistently exhibited lower pump prices and narrower gross product margins than smaller.

000.000. This study showed that an average outlet net revenue in the 19-market study group was about $70.6624 1.000 Halifax Montreal 0¢ source: MJ Ervin & Associates Although a comparison of petroleum gross product margins to their corresponding throughputs was shown to be an effective competitiveness analysis tool.• Smaller markets performed as competitively as larger centres. These costs would include salaries of marketing representatives and management. which represents the source of cash flow for three distinct purposes: • • dealer income/profit: the return or salary to the dealer. which reflects his investment in the outlet.000.6634Ln(x) + 76. brand advertising.000 6. of which gross product margin and throughput are only two of several factors.. and/or distributed to shareholders. and in major vs. corporate charity. revenues from ancillary operations (eg: convenience store.000 3. the residual revenue is available as profit to be re-invested into retail operations. etc.962 R2 = 0. not poor competition. car wash) and outlet costs were factored into the market study analysis to derive a complete measure of average outlet income (in absolute dollars) in each region. supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet.000 2. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance.000. • Using market-determined rack prices as the basis for establishing petroleum gross product margin and its related revenue. this study estimated that within the 19- MJ ERVIN & ASSOCIATES vii . head office and regional office overheads.000.000. and his personal labour investment. supplier profit: after the above costs are allocated.000 Volume (litres) 4. Consequently. an additional goal of this study was to undertake a comparison of outlet profitabilities. sales processing.000 5.000. Relationship of Gross Product Margin to Outlet Throughput (1995) 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Gaspé 16¢ Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 14¢ 12¢ Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4. smaller markets.

000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income source: MJ Ervin & Associates The study also showed that very little fundamental difference in outlet profitability existed between regions. at 1995 prices.000 $250. by all objective measures available to this study. distant outlets are clearly higher than those associated with concentrated urban markets. but that outlets in smaller (Group B) markets had higher outlet incomes than major (Group A) market outlets . were insufficient to cover outlet costs.000 $50. Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector.000) $(250.000 vs.000 $150. Although an objective measure of competitiveness is elusive. or due to lower nonoutlet overhead costs which are likely achievable by regional and independent marketers. after allowing for estimated dealer profit and supplier overhead.market study group. 1.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50. suppliers likely incurred a net loss on outlet operations in 1995. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector.$154. Despite this difference.000) $(100. The Canadian retail petroleum products industry. Average Outlet Income (before marketing overhead costs) BC/PR $300.000) $(350.000) $(200. was shown to be strongly competitive: MJ ERVIN & ASSOCIATES viii . The study showed that the average urban outlet would experience a net loss without the contribution of ancillary operations. it was likely due to profitability in the refiner side of operations in the case of integrated refiner/marketers. respectively. rural market outlets were likely to be no more profitable: supplier overhead costs associated with maintaining rural. for which this study had no specific data. Where the actual corporate results of petroleum marketers showed 1995 profits from their downstream operations.000) $(300. $61.000 $200.000 per year.000) $(150.000 $100. and that petroleum sales revenues alone.

A long-term decline in pump prices, when measured in constant and nominal dollars, was observed (Finding 10). This has not simply been a result of a decline in underlying raw materials costs; the very margins within which this industry operates has, over the long term, exhibited a diminishing trend (Finding 13). On a national level, in comparing Canada average (city) pump prices to those of the United States, Canadian prices have been at or below US prices in recent years, when taxes were excluded (Finding 14). In comparing several diverse markets, a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18).

These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. Virtually all of the competitiveness indicators examined in this study relate to price. As described in this study however, price is but one of four competitiveness “tools” available to marketers (product, place, and promotions are the other three). Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector.

2. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one.
Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. The study presents such a model, which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement, is mistaken. Rack and pump prices are determined in competitive marketplaces, each with unique dynamics. The resultant margins, which at times can decline to very low or even negative values, are thus a reflection of the state of product supply, demand and other competitive factors existing at the time. In applying such a model to the retail petroleum marketing industry, it is important to understand that, while crude oil markets are considered global in scope and rack product markets are considered regional in scope, retail petroleum markets are considered local (municipal) in scope, since this is the effective range of consumer choice. This implies that the competitive dynamics pertaining to these retail markets can, and do, vary considerably from one population centre to another. Dealers were shown to have a variety of relationships with their supplier; well over half of all outlets in Canada operate as lessees or independents, and accordingly, the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9).

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While some markets, particularly smaller ones, experienced higher than average pump prices, when the “outside” factors (tax, rack price and freight cost, for example) were rationalized, the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin, measured against the average outlet throughput for that market. This would entail the tracking of not only pump price, but also rack prices and outlet performance, an exercise that consumers are unlikely to engage in, but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues.

3. Taxation is a significant factor in the price of retail gasoline, and in some markets, presents a competitive disadvantage to Canadian marketers.
This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). By contrast, crude costs accounted for roughly 34 percent (Finding 2), refiner margins accounted for 5.3 cents or 9 percent (Finding 5), and product margins accounted for 3.5 cents, or 6 percent (Finding 6) of the 1996 average regular pump price. Petroleum product taxes are levied at the federal, provincial, and in some markets, municipal levels of government. The latter two can vary considerably from one market to another, and are a predominant cause of inter-regional pump price differences (Finding 16). The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study, but given its magnitude, taxation as an element of public policy is an area worthy of additional research. Due to the localized nature of competition in the retail gasoline marketing sector, taxation differences between Canadian and US markets, or even between Canadian markets with differing tax structures, generally do not serve as competitiveness inhibitors. The demonstrated exception to this is in markets directly adjacent to nearby US markets, but even in such cases, these markets have managed to sustain a certain level of viability and competitiveness. Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world, second only to the United States.

4. Pump price fluctuations can be an indicator of competition in the marketplace.
Demand for gasoline was shown to vary significantly according to the time of year, in a highly distinct, predictable seasonal pattern. Retail pump prices showed a corresponding seasonal pattern, reflecting consumer demand behavior (Finding 15). This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace, which in turn is the principal

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driver of ex-tax pump prices. Viewed from this perspective, fluctuating prices are a strong competitiveness indicator (Finding 7). Retail pump price changes showed a close relationship to underlying rack prices, which in turn, showed a close relationship to underlying crude prices (Finding 11). Rack prices were shown to not significantly differ between major centres, further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). While price wars are undoubtedly an indicator of competitiveness, the absence of price war activity does not imply a lack of competitiveness. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto, and more price-stable markets such as Sioux Lookout, on the basis of price fluctuation alone. In fact, Sioux Lookout, a price-stable market, exhibited competitive traits typical of any of the study markets, when examined on the margin-volume model.

5. Retail gasoline marketing revenues, on a per litre basis, constitute a small portion of the retail pump price.
The pump price/margin model shows that in 1996, the Canadian retail marketing sector realized an average gross margin of 3.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). This margin represents gross revenue (after wholesale product and freight cost) which, incorporated with ancillary revenues and outlet costs, is available to provide for all retail marketing operations including outlet costs, dealer income, supplier costs and profitability. This consolidated outlet revenue, when distributed these three ways (Finding 20), translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets, and a loss in the case of urban markets, which represent the majority of Canada’s population base. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis, it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution.

6. Declining refiner and marketing margins, have caused, and have resulted from, intense competitive pressures in the downstream industry in general, and the marketing sector in particular.
Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992, despite increases in tax content and crude costs (Finding 12), both of which are beyond the direct influence of Canada’s oil companies. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin, not price. Since 1991, the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). This trend has both resulted in, and has been a result of, several competitive strategies, including:

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emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. Both the downward trend in margins. regardless of size. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. not excessive profits. That such a relationship should exist was not surprising. but to increases in underlying rack prices. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). Also. A wide range of petroleum gross product margins were evident within the 19market study group. this industry sector would have realized profits of unprecedented proportions. these findings clearly show that pump price increases are ultimately linked not to increased profits. if Canadian average pump prices were only one cent higher than they were in 1995. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). had petroleum margins which were commensurate with average outlet throughput for that market. and the associated industry initiatives which are ongoing in nature. most markets. Industry profitability is extremely sensitive to very small changes in pump price. 7. based upon an assumed posted rack price. the rack price basis used in this study may understate actual revenues by about 1 to 2 cents per litre. and in turn. although this study provides comprehensive evidence of this. Although some smaller markets appeared to have higher gross MJ ERVIN & ASSOCIATES xii . When plotted against the margin-volume model. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. Thus. Thus. Indeed. Nevertheless. crude costs. Also. in the long term these fluctuations are likely more reflective of market restorations. Thus. 8. assuming all other costs were unchanged. While these economics might appear to place this industry in a position of poor viability. despite the predisposition of many observers to use them as such. It is likely that regional and non-refiner marketers operate with somewhat smaller overhead costs than those used in this study. serve as perhaps the most significant indicators of competitiveness in the downstream industry. Outlet throughput is a key determinant of inter-market pump price differences. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. virtually all of the 19 study markets exhibited similar levels of competition. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. When these margins were compared to their corresponding outlet throughputs.• • • improving production efficiency through refinery plant rationalizations (closures). most outlets used in the 19-market study represent major integrated oil companies. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year.

MJ ERVIN & ASSOCIATES xiii . likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. more isolated markets are generally higher than in larger centres. • • At first glance. The loss of employment represented by a station closure may be of some concern to smaller communities. poor outlet throughputs were generally the predominant factor. In suggesting this approach however. there are three points to consider: • • In very small markets. This created some economic pressure to sell product at a higher pump price. The costs of most consumer goods in smaller. thereby improving petroleum volumes and ancillary revenues at the remaining sites. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres.product margins than larger markets. and this study showed that gasoline prices were no exception. isolated markets face particular challenges: although found to be highly competitive. the solution would be to encourage some dealers to exit the market. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. 9. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. A full-serve retail gasoline outlet typically employs 3-5 staff. other factors exist which contribute to relatively high margins and prices. While competitiveness in most smaller markets was shown to be as active as in larger centres. average pump prices were relatively high. which should. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts.5 million fewer litres of gasoline than a group A (major centre) station. reducing the number of outlets may also reduce the number of competitors. according to the margin-volume model. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). in order to build upon the findings in this study towards a full understanding of the dynamics at work. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. it would seem that if local government in smaller markets were interested in lowering pump prices. reduce pump prices. Smaller. which could actually inhibit competition.

and likely others in Nova Scotia. This study proposes rather. is viewed as an agency which exists to the benefit of industry and consumer alike. The historical record is clear however: since deregulating pump prices. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. and in turn. sometimes below that of outlet operating costs. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. under the current PEI regulatory structure. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. the degree of price competition in the retail petroleum has in effect. Convenience store. as it does in the Canadian petroleum marketing sector. many national and local environmental regulations exist for good cause. are an acceptable limitation on pure competition (Finding 8). is well beyond the scope of this study. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19).10. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). Also. As these findings show. depressed petroleum revenues. characterized by narrow product margins and relatively flat pump prices. This competition then. 11. and as such. as marketers find even more innovative ways to attract market share. MJ ERVIN & ASSOCIATES xiv . will likely preserve a highly competitive petroleum market. direct regulatory interventions may have an adverse effect on competitiveness. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. that where a healthy competitive climate exists. the Halifax market. does not appear to benefit in consumer terms. and the perceived effect on their markets. Retail ancillary operations are a critical element of petroleum price competition. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. has seen a decline in pump prices relative to other Canadian markets. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. Charlottetown. is both the cause and consequence of increased activity in ancillary operations. The federal Competition Bureau for example. possibly to the detriment of the consumer. car wash. and the traditional automotive service bay.

and the nature of competitiveness influences. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. Improve public understanding and awareness of competition in the petroleum marketing sector. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research.1. petroleum marketing competitiveness. along the lines of the model used in this study. • • MJ ERVIN & ASSOCIATES xv . using Canadian and foreign selected markets. using Canadian and foreign selected markets. A regular comprehensive competitiveness evaluation. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. Public perception measurement. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. margins and competitiveness factors. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. Develop cooperative industry research into marketing sector competitiveness issues. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. not inhibit. This should be in the form of a quarterly summary of price trends and related measurements. and the converse image held in much of the public domain. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: • Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. in a simple format designed for consumers and legislators. 2. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness.

by industry. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. using Canadian and foreign selected markets. consumers. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. and issues/opportunities facing such markets. and in particular. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. • * * * Better understanding of this industry. the possible effect of underground storage tank legislation as a potential impediment to market exit and as a competitiveness inhibitor.• Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. and regulators alike. MJ ERVIN & ASSOCIATES xvi .

to analyze the rack to retail market and the market structure for refined petroleum products. Project Objectives The working group established as the primary objective of this study “. more detailed economic model of the industry from the rack price point (eg: the refinery plant) to the retail pump.. and regional differences which face the petroleum products retail industry.. The SCF laid the foundation for supplementary studies. the Canadian Petroleum Products Institute (CPPI). or even communities within the same region.. and in the process. and MJ Ervin & Associates was selected to undertake the “rack to retail”.. provide a model for better understanding the nature of competition and pricing economics within the petroleum marketing sector. A working group represented by Natural Resources Canada (NRCan). .to better understand the competitive opportunities and challenges... and in comparison to the Canadian national average and nearby USA markets”..Introduction Background Canada’s petroleum refining and marketing sectors.to draw comparisons with nearby USA markets. and . Specific purposes of this study would be: • • • • “.to help the industry cope and to enhance competitiveness.to provide a sound database upon which more effective policy decisions can be made. In 1995. or petroleum marketing portion of the study..... leading to more effective policies and reduced uncertainty for future investment. which comprise the “downstream” oil industry. including a regional. This would have several advantages: it would objectively explain the sometimes significant pump price differences that can exist between regions. and a challenging array of potential environmental initiatives. Industry Canada completed a Sector Competitiveness Framework (SCF) for the Canadian refined petroleum products (downstream) industry.” An additional study objective was that an assessment of the viability and competitiveness of regional markets be made. .” MJ ERVIN & ASSOCIATES 1 .. and that issues and challenges be identified so that conclusions and recommendations can be made “. and Industry Canada was convened to undertake this project.to determine the key factors which drive competitiveness in specific markets. to name a few. face a number of challenges: a poor public image. competitive pressures from US and offshore refiners. region by region across Canada. The objective of this project was to improve understanding of the issues affecting the long term competitiveness of this industry.

and a foundation for effective policy development. undertaken as part of this project to: • make a more detailed examination of price. Report Format and Conventions • • • • We have defined terms which may be unfamiliar to the reader. Part D: Selected Market Study presents the findings of a diverse 19-market study. all prices and margins referred to in this document are stated in nominal Canadian dollars or cents (ie: not adjusted for inflation). from which some important findings are made. due to the considerable data gathering difficulties that such an approach would entail. Supporting data to these charts can be found in Appendix II. • Part E: Conclusions and Recommendations summarizes the study findings and. or which have a specific meaning in the context of this report. Part C: Historical Trend Analysis provides an overview of prices. Specific comparisons of specific Canadian and US consumer markets were not made. Part B: Retail Structure serves to provide a general overview of the retail gasoline sub-sector in terms of infrastructure. margins and demand patterns over the past several years. Study Overview This study is in five parts: Part A: Pump Price/margin Model presents a conceptual model for understanding the interrelationship between various subsectors of the petroleum industry. presents conclusions and recommendations which arise from the study findings. Acknowledgments Three organizations were of considerable assistance in the development of this study: MJ ERVIN & ASSOCIATES 2 . margins and related implications for market competitiveness than can simply be provided by existing public-domain data. an examination of a diverse array of markets in order to determine the degree of dissimilarity or similarity between them. and in order to provide insights into the range of competitive dynamics that can exist. Many of the findings in this report are presented in graphical form. Findings are stated in bold and are summarized in part E of this report. through a multi-faceted approach. The study does provide comparisons with US markets on a national level of detail. Unless otherwise stated. Ultimately. and the effect of competitiveness on each subsector.The study meets these objectives. in Appendix I. it provides a comprehensive tool to understand the dynamics of this vital and complex industry. It also relates consumer demand patterns to pump price fluctuations.

NRCan. These included: Canadian Tire Petroleum.• Industry Canada. and Industry Canada.. assisted in securing the support and participation of member companies in the selected markets phase of the study. including Ultramar Canada. Petro-Canada. Ontario Ministry of Environment and Energy. The Canadian Petroleum Products Institute... facilitated some of the data gathering needs of this study. and provided critical guidance and feedback at several key stages in the process. for their assistance. through the involvement of Cindy Christopher and Jack Belletrutti (now with CPPI). Ministère des ressources naturelles du Québec. Petro-Canada. Imperial Oil Ltd. Finally. and their 481 retail associates whose outlet data was used in our analysis. MJ ERVIN & ASSOCIATES 3 . Consumers Association of Canada.. and also participated in the steering committee. and Shell Canada. Suncor Inc. CPPI. Natural Resources Canada. Shell Canada. Environment Canada. through Maureen Monaghan and Huguette Montcalm. several companies made a significant contribution by providing us with retail outlet operating data used in the selected market study. We gratefully acknowledge these companies. chaired the steering committee. Suncor Inc. through Bob Clapp. • • Several organizations participated in two key review sessions.

texture. public attention towards the competitiveness of this industry is most focused during a time of gasoline pump price increases. multifaceted industry. pump price changes as displayed on the street sign provide no real insights into the factors which drive competitiveness in this industry.Part A Pump Price/Margin Model Although Canada’s petroleum industry is a vast. This price/margin model thus creates a common reference for understanding the economics of retail gasoline. but simply. the particular quality of gasoline which is of most interest to consumers is not its colour. as they are in Figure 1. These relationships can be modeled. its price. as this study shows. An Overview of the Model Figure 1: Pump Price / Margin Model NOT TO SCALE PUMP PRICE TAX DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE MJ ERVIN & ASSOCIATES 4 .price .which is used by many groups and individuals to assess the competitiveness of the petroleum industry. It is this particular feature of petroleum products . In fact. principally of motor gasoline. unlike many consumer products. and serves to explain several factors that together determine retail gasoline prices at any given time. Yet. or taste. most Canadians relate to this industry in one specific way: as consumers. And. To understand competitiveness and pump price economics in the Canadian retail gasoline sector requires a clear understanding of the interrelationships between the principal stakeholders who ultimately share the revenue from the sale of a litre of gasoline. The interface between each of the stakeholders in this model is defined primarily in terms of the price at which product is transferred (sold and then bought) from one sector of the industry to its neighboring sector.

these stakeholder revenues are derived from the revenue from the retail sale. an understanding of the term itself is necessary. objective measurement for competitiveness. Before examining each of the model elements. gross margin represents revenue only. this study examines competitiveness from the latter. A General Definition of Competitiveness Since understanding and measuring downstream industry competitiveness is a general goal of this study. From an industry perspective. Gross margin is simply the difference between two price points.from the total pump revenue. While this term is often associated with the phrase “profit margin”. this study’s use of the term relates to gross margin. A consumer however. This section represents the basic model of pump prices and margins shown in Figure 1 not as a fixed view of what pump prices and margins “should be”. The revenue from the consumer purchase of a petroleum product (such as gasoline) is split among four key sectors. and in fact inextricably related. margins are squeezed or expanded accordingly. typically the retail price (the price at which the product is sold) less the wholesale price (the price a marketer pays for a product).or margin . “competitive” may be synonymous with “viable”. Each margin is quantified by its defining prices. it is important to define the term “margin”. (implying that the stated margin represents net income or “profit”). MJ ERVIN & ASSOCIATES 5 . consumer perspective. While both perspectives are valid. 1 The revenue from a petroleum sale filters down to the principal stakeholders in various ways. Ultimately however. evaluating competitiveness is therefore a partly subjective process. is more likely to equate the term with “value for money”. each essentially taking a share1 .Many of the terms introduced and explained in this section are used extensively throughout this study. Competitiveness: The Pump Price Model in Motion EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE One of the key questions this study seeks to answer is “Is the gasoline marketing (ie: rack to retail) sector truly competitive?” As there is no standard. So defined. but as a dynamic model in constant motion: as competitive forces act to move various price points up and down. any operating expenses must then be considered before making any determination of profits.

a universally acceptable definition of competitiveness is elusive. To achieve this. is the only real option in the long term. An effective functioning of markets also permits smaller competitors to expand if they meet the test. competitive activity can be observed when a competitor alters one or more of MJ ERVIN & ASSOCIATES 6 . provide some means for comparing the type and to some extent. This market condition requires that competitors consciously seek to attract business away from each other by price and other means and in turn. The actions by business rivals place an upper limit on the prices a firm can charge for its products. such actions by rivals continuously pressure a firm to lower its costs in order that the highest prices the market will permit it to charge enable it to earn a sufficient return of investment to attract investors. They are sources of creative destruction by which monopolies or inefficiencies are destroyed and new entrants and greater efficiency are encouraged.Unlike many business or economic concepts. or in other words. Simply put. the result of price competition is reduced profit. the degree of competition within a market.. and the entry of new competitors and new ideas. this usually requires a reasonable number of competitors.Competition means therefore an effective functioning of markets which promotes and requires rivalry amongst competitors for the business of consumers. More importantly. Technological change and innovation are the large levers of competition in industry. in the sense in which it is something in the public interest. any attempt at arriving at an objective measurement of competitiveness would be subject to considerable debate. competitors can either restore higher prices or reduce costs. A useful explanation of competition in the petroleum marketplace was advanced by the Restrictive Trade Practices Commission report “Competition in the Canadian Petroleum Industry” in May. 1986: “Competition may mean very different things to different people. one must ask how marketers compete. This study therefore attempts simply to identify and illustrate competitiveness indicators which together.” “. and unless care is taken to use the word precisely. it can frustrate communication and obscure analysis. reducing costs. as competitors seek to attract market share through lower prices. In competitive markets the prices of the various competitors inevitably tend toward the same levels because all available cost-savings techniques will be adopted by all the (surviving) competitors. Inevitably. Conditions for a competitive market can be deemed to exist when: • • more than one. in order to maintain some level of brand variety. Accordingly. Competition can only be sustained therefore. represents a process by which prices are set. Since a competitive market effectively limits the price option.” Price Competition in the Oil Industry In order to assess competitiveness. if market conditions allow a sufficient number of players to remain profitably engaged. and at least one of the competitors wishes to improve its revenue by gaining a larger share of the market (profit motive). improving efficiencies.. Price competition. and ideally many entities offer the same or similar products (brand variety).

the most effective of these as a competitive tool is price. in rack markets. Price. In fact. and are generally known as integrated oil companies. 1960) 2 Although distinct. so a brief description of these. p. (Homewood. Nevertheless. where upstream oil producers compete on a global scale to sell crude oil to petroleum refiners. The converse notion that the industry establishes a “should be” margin. and are beyond the scope of this study.. whose main activity is the exploration and development of crude oil. Jerome McCarthy. which in turn defines a proper market price. competition in the crude and rack markets deserves some mention. is false. Finding 1: Refiner and Marketing Margins are a consequence of their defining prices. and the downstream industry. in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale. Ill.: Richard D. and in retail markets. It is also important to stress that the market ultimately sets rack and retail pump prices.44 (1st Dec. commonly known as the “marketing mix”1. Place. competition acts to self-regulate prices in three distinct marketplaces2: • • in crude oil markets. where petroleum refiners compete on a continental scale to sell refined petroleum products (eg: gasoline) to retail marketing organizations. or four P’s: Product. 1971). which focuses more on the infrastructure and mechanisms which promote or inhibit competitiveness at the retail level. the raw material from which gasoline is made. Within the broad context of the oil industry. which in turn defines the margins. the geographic scale of competition is an important consideration. whose main 1 E. some organizations have operations in two or more of these markets. While those who reside in oil producing regions such as Alberta often think of the oil industry in terms of crude oil and natural gas exploration and production. and Promotion. New York. • Thus described. and a comprehensive description of retail price competition follows: Canada’s Petroleum Industry: Upstream and Downstream The “oil industry” can mean many things to many people. Irving. Given the commodity nature of petroleum products.the variables at their disposal. 4th Ed. most Canadians relate more in terms of retail gasoline marketing. MJ ERVIN & ASSOCIATES 7 . the “oil industry” consists of two distinct industries: the upstream industry. where retail gasoline dealers compete on a local scale to sell gasoline to the motorist. and as will become more evident in this study. but a retail dealer in Toronto is more concerned with the competitive threat posed by other dealers within perhaps a 1 to 2 kilometer radius. particularly in the crude (upstream) industry and refiner sector. Basic Marketing: A Managerial Approach. A refiner in Toronto may well compete with a refiner in Buffalo. The dynamics of upstream and refiner competition are major studies in themselves.

as a minor contributor to the world crude supply. and in the open market structure that exists in Canada. a brief discussion of its relationship with the upstream industry is useful: Upstream Industry CRUDE PRICE UPSTREAM The starting point of the pump price model is commonly referred to as the upstream industry. In providing historical comparisons of crude to rack/pump prices. that is to say. Canadian producers have virtually no influence over world crude prices.activity is the refining of crude oil into petroleum products. it is important to examine its relationship with its neighboring downstream industry. our crude prices rise and fall according to price benchmarks established far beyond our own shores. drilling. Canadian producers must compete to sell their production to refiners. While this study focuses on the downstream industry (and in particular. and refinery production methods. gasoline grade. Canadian producers are known as “price takers” rather than “price setters” of crude prices. alongside major producing countries such as Saudi Arabia. and transportation of crude oil to the refinery plant.the raw material from which gasoline is made. Although this industry is not the focus of this study. production. implying that it fluctuates. this study uses a fixed percentage of the Edmonton Par crude price as a standard assumption. which gives an accurate portrayal of month-to-month crude price fluctuations. Infrastructure The upstream oil industry encompasses a broad range of operations. consequently. It is difficult to precisely quantify the upstream “content” in the price of a litre of gasoline. The upstream industry’s crude price is represented in Figure 1 as elastic. MJ ERVIN & ASSOCIATES 8 . rather than a fixed value. it is probably sufficient to say that. Crude oil is a commodity which is traded in a global marketplace. which it does on a continuous basis. which finds and produces crude oil . and the delivery and sale of these products to the consumer. in several commodities trading centres around the world. Competitiveness in Crude Markets The nature or extent of price competition in the crude oil marketplace is a subject of considerable debate. Within the scope of this study. due to variables such as crude quality. its marketing operations). from the exploration for potential crude or gas reserves.

and some attention to the refiner sector is therefore given here. Some discussion of the interface between refiners and marketers is essential to a full understanding of the marketing function however. and lubricants. one of the key attributes of this sector is the very high capital cost of a refinery plant facility: roughly one billion dollars in today’s dollars. and numerous safety and environmental safeguards. personnel. day-to-day plant operations are cost-intensive. or roughly 34 percent of the pump price. manufactures a range of refined petroleum products including gasolines. oil producers must explore for potential reserves. MJ ERVIN & ASSOCIATES 9 . and marketers who. as a factor of the regular gasoline retail pump price. and pay out royalties to the resource owner. A modern refinery is a sophisticated work of engineering. is the provincial government. This sector acquires crude oil. As is typical of many manufacturing organizations. Although a description of the process of turning crude oil into gasoline is outside of the scope of this study. is called the refinery. As a general measure: Finding 2: 1996 average crude price. drill for. diesel. heating fuels. in the petroleum sector. who manufacture petroleum products from crude oil. put simply. its predominant feature is the plant facility which. which in oil producing provinces such as Alberta. and from this feedstock. and hopefully realize some production. In addition.While some suggest that the price of gasoline should rise and fall exactly with the crude price. Infrastructure The petroleum refiner sector represents the manufacturing stage of the life cycle of petroleum products. was 19. crude is only one of several factors that influence pump prices. The focus of this study is on the marketing sector of the downstream petroleum industry. From this revenue. involving energy. maintenance. buy refined products from the refiner and sell them to the end-use customer.1 cents per litre. Petroleum Refining DOWNSTREAM MARGIN RACK PRICE REFINER MARGIN CRUDE PRICE Within the downstream oil industry there exists two distinct sectors: refiners.

and a return on the considerable capital investment in the plant facility. less the price at which it bought its raw material2 (rack price minus crude price). Wholesale volume data is not readily available on a market-specific basis. the gross refiner margin is elastic. 1 Dealer Price is not included here. The Bloomberg Oil Buyers’ Guide™ currently lists twenty Canadian rack points. In simple terms. If for example. Historical data is readily available for crude and rack prices through publications such as Bloomberg Oil Buyers’ Guide™. While refineries are always rack price points. which provides an independent and objective determination of rack-based gross refiner margin. but with no material effect upon the Gross Product Margin derivation. The existence of rack price in a given market is not of itself. refiners sell their product under a variety of arrangements. Of these three refiner prices. and accordingly. a considerable volume of petroleum product must actually trade using rack price as the transaction basis. rack prices also exist at many nonrefining centres where there is sufficient wholesale demand for petroleum product. which can be broadly categorized as follows1: • • • rack price . For a competitive rack market to exist. indicative of a competitive wholesale rack market.the price charged for immediate supply on an “as available” basis. some clear competitiveness indicators exist. as they relate to negotiated. Contract and transfer prices are not openly shared. since the market-driven rack price provides an objective. For simplicity. Canadian refiners produced only sufficient product to supply their own networks of retail facilities.the price charged to a non-refiner marketer (or other sales channel customers) usually under the terms of a long-term supply agreement. the relative competitive strength of any given rack market is difficult to assess.this is the “internal” price charged by a refiner to the marketing arm of the same company. In fact the refiner typically pays a higher price than the benchmark crude price. On a national basis however. external measurement of the current market value of a particular petroleum product. This margin provides for plant operating costs as described above. many of which do not have integral refineries. Since both crude and rack prices fluctuate according to market forces. Although contract and transfer prices are distinct from rack price. being squeezed or expanded between these two price points. there would be little or no market-driven competitiveness in the refiner sector. representing major Canadian population centres. reflecting the cost of transporting the crude from the producing region to the refinery plant. as this price point exists within the marketing sector. which may cause Gross Refiner Margin to be slightly overstated. the gross refiner margin is the price at which the refiner sells its refined product. only rack price information is readily available in the public domain. the pump price model uses the term “rack price” to refer to the refiner’s sale price of refined petroleum. In fact. this model only uses the benchmark crude value. confidential terms between the seller and specific buyers. transfer price . contract price . not the refiner sector.Price/Margin Model Elements For simplicity. they use rack price as their basis. 2 MJ ERVIN & ASSOCIATES 10 .

but at the expense of marketing income. who compete for a share of this demand. and in the case of gasoline. most refiners also participate in the marketing and retailing of petroleum products.for example. MJ ERVIN & ASSOCIATES 11 .000 km) for overland truck transport. As shown in Figure 15 (page 35). this limits a marketer to a relatively short range (perhaps 1. market-driven Rack (wholesale) pricing of petroleum products. it follows that: Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive. wholesale refined product is bought and sold across very large distances. With a large proportion of the Canadian population within a few hundred kilometers of the United States and/or able to receive marine supply. in order to maintain realistic accountabilities within each of the two sub-sectors. In examining the structure of the Canadian refiner sector. even overseas. The mechanisms that drive rack prices are more fully discussed on page 36. 1 Based on Octane Magazine Retail Outlet Survey data. There is no “windfall” profit in setting an unrealistic transfer price: a higher than market transfer price. would produce better than expected refiner income. potential sources of wholesale product supply for most Canadian non-refiner marketers. but with their US and European counterparts. for example. due to the relatively small transportation cost. integrated refiner-marketers establish transfer prices at.Competitiveness in the Canadian Rack Marketplace A great deal of Canadian refinery output is sold outside of the refiner’s own marketing infrastructure . market-driven rack prices. Integrated Refiner-Marketers In Canada. rack prices are also demonstrably competitive in the sense that there is historically a high degree of price uniformity between any two rack points in North America. These independent marketers naturally seek to purchase their product at the lowest available cost (rack price or a negotiated contract price). who themselves do not refine petroleum products. to major industrial consumers. In practice. or transfer price. as there is no obvious market mechanism to regulate its setting. and which supply petroleum to about one-third of all retail outlets in Canada1. or close to. arises. Canadian refiners must therefore be price competitive not only with each other. many US and European refineries are in practice. The range of potential refiner sources from which a marketer can choose is largely dependent on the transportation costs involved in bringing the product from the refiner’s rack point (ie: the bulk distribution terminal) to the destination market. to so-called “independent” petroleum marketers. In practical terms. the question of the internal selling price. petrochemical producers. In these cases of so-called “integrated” refiner-marketers. from any one of several regional refiners. but where pipeline or marine fuel terminal facilities exist.

Infrastructure Although most consumers associate petroleum marketing with retail gasoline stations. Wholesale Sales to a wide variety of customers. including mining. For this reason. Direct sales consumers do not use the infrastructure associated with the refiners’ own brand. product is sold from a central facility. and who essentially deal directly with the refiner.Petroleum Marketing DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT The petroleum marketing sector represents the final stage of the pump price model. media and regulatory attention. It is this sector which has direct contact with the petroleum consumer and it is this sector. principally into commercial trucking operators’ vehicles. • • MJ ERVIN & ASSOCIATES 12 . each with its own distinct infrastructure. Within this industry sector. as a popular and relevant “window” on the petroleum marketing sector. this study focuses upon price and competitiveness factors that relate to retail gasoline marketing. as detailed in Table 1: • Direct Sales to major customers who generally purchase several million litres of petroleum product annually. Retail Sales to the domestic motorist. farming. and aviation. and purchase at or near the established rack price. gasoline price and competitiveness issues attract considerable public. home heating. trucking. Marketing operations within this sector can be broadly classified into three elements. which “sets” the retail price of gasoline. in the minds of many consumers. this is only one (albeit an important one) of several sales channels that exist within the petroleum marketing sector. Product is either delivered to the customer by the supplier’s (or an associate of the supplier’s) tank truck. the most recognized element of the downstream oil industry. or in the case of cardlock facilities.

to the motorist consumer. and regular gasoline in particular. Retail outlets are operated in a variety of modes. and usually supply customers by delivery to the customer’s own storage tank. at a negotiated contract price. which primarily serve long-disttance truckers and commercial delivery and haulage operators. Some larger petroleum marketers also operate a network of retail outlets which are identified with a different brand than the primary. as discussed. usually involving some aspect of the marketing sector infrastructure. Sales of home heating fuels to residential furnace oil customers. for example. Sales to spot buyers at posted rack price. Sales to commercial and industrial accounts by the wholesale marketing sector. MJ ERVIN & ASSOCIATES 13 . Primary Brand Second Brand Retail gasoline sales through the principal brand name associated with the supplier. There are over 850 cardlock outlets in Canada. as principal elements of petroleum marketing operations. one final element of the pump price model must be reviewed. There are about 16.Table 1: Downstream Sales Channels Sales Channel DIRECT SALES Major Industrial Spot Rack Contract Supply WHOLESALE Infrastructure Description Sales to major accounts. Bulk Sales Home Heating Aviation RETAIL The remainder of this study provides a detailed examination of the retail petroleum products industry in general. Sales to non-refiner petroleum marketers. which is generally less than the rack price. using delivery tank trucks. Sales of petroleum products through bulk sales outlets. such as product transport and/or storage. typically at the “rack point”. in smaller centres. according to the contractual relationship between the supplier and the dealer. Sales of petroleum products (principally gasoline) through retail gasoline outlets. In major centres dedicated Home Heat centres provide this service. to the aviation fuel consumer. These outlets usually have considerable inventory capacity.500 retail gasoline outlets in Canada. The name “cardlock” refers to the coded access card which the customer uses to activate the fuelling pump at the outlet. There are over 1. by delivery tank truck. Sales of aviation fuels at major and secondary airports across Canada. often delivered by pipeline or ship/barge. heating fuel delivery is an integral part of a bulk sales outlet. Sales to major industrial accounts. Before examining this sector in detail.300 bulk sales outlets in Canada. Cardlock Sales of petroleum products through a network of consumer-operated fuel dispensing facilities. Direct sales generally do not involve any marketing sector infrastructure.

which amount to 28. stable amount. the tax content of the petroleum price is essentially a pre-determined. typically made up of: • • • • a ten cent per litre federal excise tax. provincial sales tax. would include a roughly 0. in a small number of markets. A three-cent drop in pump price. The petroleum industry acts as a collector of these taxes.2 cent (0. for example. and seven percent GST.3 in Quebec) drop in the tax content. regardless of market conditions. If the pump price decreases for example. As part C of this study shows. or roughly 50 per cent of the pump price.Taxation on Petroleum Products PUMP PRICE TAX EX-TAX PUMP PRICE Unlike gross product margin. 1995 product taxes on retail gasoline alone represented approximately 9 billion dollars in federal and provincial government revenues. Table 2 shows the provincial tax content for retail gasoline. tax content does fluctuate somewhat with pump price changes. the tax content of retail gasoline in Canada has increased steadily over several years. MJ ERVIN & ASSOCIATES 14 . 1 Due to the application of GST (and in Quebec. this decrease is reflected in a reduced gross product margin the tax content stays essentially the same1. PST). municipal taxes.6 cents per litre (Canada 1996 10-city average).

MJ ERVIN & ASSOCIATES 15 .5 Total Tax 24.0 9.6 3.5 3.6 22.0 10. Quebec pump taxes are reduced by varying amounts in certain remote areas and in markets within 20 kilometers of provincial or US borders. All Quebec gasoline sales are subject to a 15.0 3.1 25.0 GST content (7% of pump) 3.0 10.0 4.0 10.2 24.6 3.2 24.5 cents was introduced in the Montreal and surrounding area in 1996.3 Federal Excise Tax 10.0 10.4 3.5 12.0 10.7 3. plus a 6.0 15.3 10.0 14. Provincial Tax 11.3 27.3 20.5 6.5 cents and 4. An additional pump tax of 1.9 3.6 3.0 3.1 32.0 28.2 cent per litre pump tax.0 11.0 10.2 10.0 10.7 13.8 note 1 note 2 An additional tax of 1.7 30.6 3.6 25.0 10.Table 2: Taxes on Regular Gasoline on December 31. 1996 (City)Province BC (1) Alberta Saskatchewan Manitoba Ontario Quebec (2) New Brunswick Nova Scotia PEI Newfoundland Yukon NWT Canada Ave.5% sales tax applied to the GST-inclusive pump price.0 10.0 27.0 10.0 cents is charged in the greater Victoria and Vancouver areas respectively.5 14.0 10.0 16.0 28.7 18.8 4.0 10.

1 ¢ 5. some profit return for the shareholder.5 cents per litre (after freight cost). including retail outlet distribution. or 34 percent of the pump price.3 cents per litre.4 ¢ 19. the brand supplier’s costs. Figure 2 integrates the pump price model with NRCan 1996 regular gasoline product prices (10-city average). based on regular unleaded gasoline.6 cents per litre.3 ¢ 28. and ancillary operations. and potentially.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3.1 cents per litre. The residual. Figure 2: 1996 Average Prices/Margins .3 ¢ CRUDE PRICE source: Natural Resources Canada • • • • Tax accounted for 28.5 ¢ 0.Part B The Structure of the Retail Petroleum Products Sub-Sector While part A of this report established a conceptual framework of Canada’s petroleum industry. It also provides an overview of the industry in terms of several infrastructure parameters. This 1 Prices and margins reflect a Canadian 10 city average. operating modes. or 50.2 ¢ 24.3 percent of the average regular gasoline posted pump price.8 ¢ TAX 28.Regular Unleaded1 NOT TO SCALE PUMP PRICE 56. Pump Price/Margin Model: An Integrated View Having reviewed each of the four key pump price/margin model elements. namely the dealer’s costs and income. 3. Refiner operations realized 5. Upstream operations realized 19. to derive a representative value for regular gasoline gross product margin in Canada. and the retail gasoline sub-sector in particular. or 9 percent. MJ ERVIN & ASSOCIATES 16 . was available for product marketing operations. this section provides a view of the Canadian petroleum marketing sector.

gross product margin represented 6 percent of the Canadian average regular gasoline pump price. In referring to marketing margins and product margins. the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market. which in the case of retail gasoline. three key findings can be stated: Finding 4: Finding 5: In 1996. for example) is sold/transferred at the current rack or transfer price. This margin represents the revenue which provides for two key operations: • Freight: Freight (or distribution) is the transportation of petroleum products from the rack or refinery point to the final point of sale.3 cents per litre. Freight MJ ERVIN & ASSOCIATES 17 . is usually the gas station. was 5. The gross marketing margin. In 1996. petroleum taxes accounted for 50. Both refiner and marketing margins have been in decline over the past several years. and is often out-sourced to third-party common carriers. was 3. In 1996. Finding 6: Marketing Sector Overview DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT Once the refiner has completed its work. and rack price.3 percent of the average urban price of regular gasoline in Canada. it falls into the domain of the marketing sector. and is then transported to the retail outlet. or “rack to retail” margin. The marketing sector then. this is seen as a “non-core” business. Although many petroleum marketers conduct their own freight operations. as part C will describe. See page 10 for further explanation. is the second of two elements of the downstream oil industry. Freight cost does not typically fluctuate. and it is depicted in Figure 1 as a fixed cost element. is defined by the marketdriven price points of ex-tax pump price. Based on the 1996 data. the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline. the finished product (gasoline. It is this sector which provides the entire infrastructure for bringing refined petroleum products from the refinery plant facility to the ultimate end-use consumer. Bloomberg rack price values were used as the assumed wholesale price. As the product leaves the refinery plant.5 cents per litre.

together with gas station dealers. as it represents 80% of all retail gasoline sales. as it excludes the “outside variables” of tax. Grade Differentials Most of the Canada average product prices cited in this study refer to regular unleaded gasoline (RUL). Posted pump price includes all of these variables. incur a variety of costs.1¢ Tax 28. Figure 3: 1996 Average Regular Gasoline Margins (56.costs are generally less than one-half cent per litre in most major Canadian cities. As represented in Figure 3. which are typically close to a wholesale rack point. but can be as high as 3 to 4 cents in markets more distant from the refinery point: this partially explains why some small. Gross product margin is therefore defined as gross marketing margin less freight cost. typical of any retail business. This is a particularly useful measurement in comparing retail gasoline markets. and upstream/refiner margins. Modern pump and underground tank installations have greatly reduced the environmental and safety concerns associated with petroleum products.3¢ 3. freight. • Product sales: Within this domain. an average gross product margin for regular gasoline in a major Canadian city was 3. Midgrade and premium grades (which have a higher octane content) represent 5% and 15% of MJ ERVIN & ASSOCIATES 18 .8¢ Pump Price) Upstream Operations 19. and is therefore a poor comparative tool.5 cents per litre in 1996.000 per outlet.6¢ Refiner Operations 5.3¢ source: Natural Resources Canada The determination and comparison of gross product margins in selected markets is a key objective of part D of this study. but at an average cost of over $200. petroleum marketers. storing and dispensing a product such as gasoline adds considerably to the operating cost. rural markets experience higher pump prices than do larger centres.5¢ Product Operations Freight 0. Unlike most other retail enterprises however.

and Promotion. competitive activity can be observed when a marketer alters one or more of the variables at their disposal. Prices for midgrade and premium grades are established in the same way as RUL prices: through competitive activity. Place Typically. and accordingly. or when comparing price levels between markets. Basic Marketing: A Managerial Approach. etc. 2 E. but most consumers view gasoline as a commodity. • Product In the past decade. will ultimately purchase based on price. Ill. In the 1960’s and 1970’s this type of competitive activity was evident in the retail gasoline sector. rather than the most places. Although revenue from this product is factored into the study market economics in Part D. competitive strategy of this type focuses heavily on selecting the best place. Irving. (Homewood. page 24).). Environmental concerns and associated costs have dictated greater selectivity in developing new sites. The grade differential varies somewhat from city to city. as gas stations proliferated. Competitiveness in the Retail Gasoline Sub-Sector Retail Competitive Practices and Indicators A retail gasoline marketer competes at many levels: At a general level. marketers compete for the consumer’s choice of transportation energy (for example. Specific competitiveness indicators relating to product would be: • • • introduction and promotion of gasoline grade features such as octane content. but in 1995 was typically 5 cents per litre for midgrade. marketers compete to be represented in as many and/or the best locations as possible. Today. and the price difference between these grades and the RUL price is referred to as the grade differential. and confines itself to the more specific (and popular) issue of brand competition for retail gasoline.44 (1st Dec.retail gasoline sales respectively1. marketers have attempted with some success to differentiate their product offerings from other brands. it represents a very small percentage of total retail petroleum sales. gasoline). Place. seasonal blends.” or four P’s: Product. p. Price. and 9 cents per litre for premium gasoline. RUL prices are therefore most often cited when relating historical price trends. In order to measure competitiveness. one must ask how marketers compete.. This study does not examine such a broad issue however. Jerome McCarthy. commonly known as the “marketing mix2. additives. Examples of competitiveness relating to place include: • opening new or upgrading existing facilities. Today.: Richard D. propane vs. A portion of the market certainly responds to this type of competitive strategy. 1960) MJ ERVIN & ASSOCIATES 19 . 1971). Higher octane grades are more expensive than RUL. 4th Ed. a number of factors preclude this type of strategy. Simply put. Price competition has forced marketers to optimize outlet revenue. 1 Diesel is another petroleum product sold at many retail outlets. expanded product/services offerings such as convenience items. This has resulted in a decline in the number of retail outlets in the past two decades (Figure 5.

and due to the already slim margins available to marketers. This study presents an extensive historical and comparative analysis of pump prices. As such. their subsector margins. it is useful to address some of the general competitive mechanisms behind these particular competitiveness indicators. Promotional activity seems to have decreased in the past few years. price has proven to be the most widely used competitive tool by gasoline marketers. Examples of promotional competition are: • • • brand identity gasoline discount coupon. Consequently. and therefore “trades” within a relatively narrow price range. gasoline is a commodity. Price Uniformity and Volatility As the degree of price uniformity and volatility in the retail gasoline sub-sector is often perceived as synonymous with its competitiveness. probably due to its relatively high cost. • Price In most markets. At its extreme. promotion strategies generally attempt to provide the consumer with added value without resorting to pump price reductions. volatile pricing manifests itself in the form of a price war (see below). volatile prices . • • • While examples of all of these indicators are abundantly in evidence. Establishing an objective measurement of price as a competitiveness indicator however. and more importantly. this study examines the dynamics of price competition in considerable detail. price clearly remains the predominant competitive tool used by Canadian gasoline marketers.while uniform pump prices are sometimes cited as evidence of industry collusion. Examples are: • prominently displayed prices . gasoline is viewed by consumers as a commodity uniform in quality and widely available. fluctuating pump prices are a significant indicator of robust competition among marketers.• • closure of non-viable outlets. low prices and/or margins. caused by price competition. due to the largely commodity nature of petroleum product. MJ ERVIN & ASSOCIATES 20 . In this context.contrary to some public perception. is less clear. free item with purchase or special price item with purchase.that pump prices are almost universally displayed on highly visible outlet billboards is indicative of the importance of price as a key selling feature. This study therefore focuses on the nature of product price as a measure of competitiveness in the Canadian “rack to retail” sector. in fact it is indicative of some consumer perception that one brand of gasoline is essentially the same as the next. Promotion In the gasoline retailing sub-sector. uniform prices .

and provide to the dealer what is commonly referred to as price support.where the ex-tax pump price is equal to. are indicators of a competitive market. The effect of this upon the gross marketing margin is obvious: it is squeezed. But if the pump price increase is a reasonable reflection of the underlying change in gross product margin. When this occurs. This is a misconception. Price Support In times of “normal” pump prices. or even undercut the competitor’s lower price. it is often cited as evidence that marketers engage in direct communication to “fix” prices at an agreed-to level. Pump price signs are an ubiquitous feature of the retail gasoline industry. obviously at the expense of the supplier margin. 1 This does not occur at company operated or commission outlets. competitors may not follow. for example). in order to maintain a reasonable market share. The other dealer has little choice but to quickly match. or even less than. the supplier may temporarily intervene. A common factor in both falling and rising prices is the posted price sign: it is this device that instantaneously communicates pump prices not only to consumers. Whether through falling pump prices or rising rack prices. and gasoline is perhaps the only consumer product in Canada that is so consistently advertised in this way. or when prices rise or fall apparently in unison. gross product margin will eventually diminish to a point that is not viable for a majority of competitors. competitors will likely match this price. Finding 7: Price uniformity and price volatility. If the posted price increase is too high. since they too must restore their gross product margins to sustainable levels. assuming that the rack price is unchanged. its effect is to restore some measure of the dealer margin. but to competitors. one must adopt the perspectives of both consumers and competing.When pump prices are uniform. While this support may take one of several forms. Pump prices therefore tend to move uniformly within a very short time. who then react quickly to the change. the relationship between the supplier and dealer is generally as described on page 25. To understand the phenomenon of uniform pump prices. the wholesale rack price. there are times (during a price war in particular) when the retail pump price may fall to a level that provides the dealer with an insufficient margin1 to meet operating costs. in an attempt to gain market share. If one dealer decides to reduce pump prices (by two cents. facilitated through street price signs. adjacent dealers. or even being squeezed to zero . There have been examples of this margin being squeezed to a point that is insufficient to cover operating costs. In the case of lessee or independent dealers however. This price lowering mechanism may sometimes result in a “price war” if each competitor continues to undercut the other. MJ ERVIN & ASSOCIATES 21 . bypassing the higherpriced outlet. One of these competitors will be forced to make a difficult decision: to be the first to raise pump prices in order to restore gross product margins to a viable level. the effect on many consumers is immediate: they will drive into that station. since there is no “dealer margin”.

the Bureau investigated four well-publicised allegations of anti-competitive behavior on the part of major oil companies in the spring and summer of 1996. Price maintenance: where a supplier exerts upward influence on prices upon a dealer. Prince Edward Island is the only province which directly regulates gasoline and fuel oil prices. In addition. These cases have largely involved local dealers and/or isolated incidents. There are few current examples of direct government intervention in the pricing of petroleum products. the petroleum marketing sector has been the subject of several inquiries at federal. resulting in 9 convictions. most with the general mandate of examining the “fairness” of competition and pump pricing among petroleum marketers. Price discrimination: where a supplier charges different prices to competitors in the same market who purchase similar volumes of products. While this study does not intend to undertake a detailed review of the effect of the Act. Price Competition and the Regulatory Process All retail competitiveness in Canada comes under the purview of the Competition Act. The outcome of the RPTC study can generally be characterized as acknowledging that a healthy state of competition exists in this industry. and a brief discussion of this case appears in part D. which is administered by the federal Competition Bureau (Industry Canada). Conspiracy: where several competitors act to fix prices for the purpose of reducing competition. however. 1997 MJ ERVIN & ASSOCIATES 22 . in the past twenty-five years the Bureau has prosecuted a total of 11 violations within the Canadian retail gasoline sector.Under the provisions of some price support mechanisms. Nova Scotia market may provide an example of the potential negative consequences of direct intervention. A review of historical retail pump prices in the Halifax. Perhaps the most notable of these was the 1986 Restrictive Trade Practices Commission (RPTC) study “Competition in the Canadian Petroleum Industry”. the Bureau found that there was no evidence to support these allegations1. provincial and even municipal levels. Following a year-long investigation. control over retail pump price effectively reverts to the supplier. An examination of the effect of the Competition Act. or of direct government intervention in marketing. Quebec has recently passed legislation which prohibits the selling of (retail) gasoline or diesel at a price which is lower than the (wholesale) cost to a retailer in any trading “zone”. but reverts back to the dealer when the support arrangement is ceased. 1 Competition Bureau press release “Gasoline enquiries find no evidence of anti-competitive behavior” dated March 18. is beyond this study’s scope. The Bureau enforces provisions of the Act which prohibit: • • • • Abuse of dominant position: where a firm (or several firms in collaboration) uses its market power to lessen competition. In addition. More recently.

This issue is discussed more fully in part D. Retail Gasoline Demand Gasoline is but one of many products produced by the Canadian downstream industry (Figure 4).Competitiveness Factors (Drivers and Inhibitors) Competitiveness factors can be defined as those forces which act upon the industry to increase (drive) or decrease (inhibit) competitive practices. This may have the effect of reducing volume and revenue potential at other retail sites in the vicinity. and is the single largest market for gasoline products. creates an obstacle to. particularly in smaller population centres. These regulations clearly exist to the benefit of all. one can cite examples of regulatory obstacles to exit from the retail gasoline market. but exist to meet other important societal needs.500 retail gasoline outlets across Canada. a competitive climate. As a product group however. Retail gasoline sales. accounting for 41% of all petroleum demand. sales of gasoline through the roughly 16. accounts for about 37% of all refined petroleum demand in Canada. that is. creating a need for higher margins. Conversely. exit from an non-viable market. So defined. it is clear that government policy plays an important role in facilitating. and consequently. or incentive for. may find it more attractive to continue operating a marginally viable gasoline outlet than facing the cost associated with the removal of inactive tanks and/or potentially contaminated soil. A practice. is in part. higher pump prices. It is important to acknowledge that many regulations affecting the retail gasoline industry. for safety and environmental protection. and at least some of this capital cost is regulatory compliance-driven. accounting for roughly 88% of all gasoline demand. in the form of standards for the decommissioning of retail petroleum sites. a consequence of regulations which stipulate minimum standards for the design and construction of petroleum storage tanks. MJ ERVIN & ASSOCIATES 23 . The high cost of building a modern retail gasoline outlet for example. but the considerable investment represented by a modern retail outlet has the effect of limiting market entry to those with sufficient capital to put at risk. inhibit competition. or incentive for. promotes or limits market-driven pump prices. or inhibiting. improves or reduces a “level playing field” in terms of the ability of one market to compete with another on the basis of price or operating costs. entry into an attractive market. Many smaller retail owner-operators. as outlined above. it is the single largest one. Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature. to some degree. policy or regulation can be deemed to be a competitive factor if it: • • • • creates an obstacle to.

3% Total Sales Volume: 84. This survey accounts only for major established retail networks . This study provides an estimate of the actual retail outlet population. as shown in Figure 5.9% PetroChem Feedstocks 5.1988-1995 24000 22000 Estimate of Actual Outlet Population 20000 Octane Magazine Survey 18000 16000 14000 1988 1989 1990 1991 1992 1993 1994 1995 source: Octane Magazine (estimate by MJ Ervin & Associates) MJ ERVIN & ASSOCIATES 24 . Figure 5: Canadian Retail Outlet Population .2% Retail Gasoline 37.7% Lube/Grease 1.2% Asphalt/Coke 4.Figure 4: 1995 Refined Petroleum Products Demand by Product Category Naptha/Avgas/ Stove/Kero 6.6% Other Gasoline 4.452 Million Litres source: Statistics Canada (Cat# 45-004) National Retail Petroleum Outlet Representation The most frequent source of information on the population of retail gasoline outlets in Canada is the Octane Magazine Annual Retail Survey.9% Diesel Fuel 22. nor is there any federal or uniform provincial enumeration of retail gasoline outlets.2% Propane /Butane 2.7% Light/Heavy FuelOils 14.it has no practical means to enumerate each and every outlet.2% Other 0.

000 outlets in 1989. Company Operated MARKETING MARGIN PRODUCT MARGIN = BRAND SUPPLIER MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. Company Operated outlets have no MJ ERVIN & ASSOCIATES 25 . Distribution of these outlets by province (Figure 6. who holds initial title to the refined petroleum as it leaves the rack point. There are two main stakeholders involved in the marketing of retail gasoline: the supplier. using Octane counts only) is roughly equivalent to population densities.500 in 1995. or modes. as owner of the product. The principal dealer and attendants are salaried employees of the supplier. and usually owns the brand name seen at the retail outlet. and the dealer. exist between retail dealers and their suppliers.The estimated number of retail outlets in Canada has declined from 22. the retail outlet is owned and operated entirely by the product supplier. as one might expect. and this is of some importance with respect to the matter of prices and competition in this sector. to about 16. controls the setting of the pump price. who manages the day-to-day operations at the retail outlet. Several possible relationships.513 723 source: Octane Magazine Retail Petroleum Outlet Modes The retail gasoline marketing infrastructure is much more complex than represented in Figure 1. and all inventory and revenues belong to the supplier. Figure 6: 1995 Retail Outlets by Province PE 136 Northern Canada 65 576 NF 711 657 NS NB QU 3777 1610 BC 1716 AB SK 911 MB ON 3631 Total = 14. The supplier.

Control of Pump Price Dealer Compensation supplier a commission from the supplier. Since the supplier owns the petroleum product at this type of outlet. the supplier retains control of the retail pump price.sub-component margins . based on pump sales volume. who may pay the supplier a lease fee for the use of merchandising space 26% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In the lessee mode. The lessee purchases petroleum MJ ERVIN & ASSOCIATES 26 . The dealer in turn hires attendants. an employee of the supplier supplier supplier typically the dealer. and pays them from his commission revenue.the entire gross product margin accrues to the brand supplier. the supplier typically owns/controls the principal outlet facility which in turn is leased out to the dealer or lessee. the outlet facilities and petroleum inventory is owned by the supplier. the “dealer” is actually an employee of the supplier supplier supplier typically the supplier 15% Control of Pump Price Dealer Compensation Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Commission Operator MARKETING MARGIN PRODUCTCOMMISSION EXPENSE MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. usually based on cents per litre of petroleum sales. who pays all outlet operating costs. but the outlet operator (“dealer”) is compensated by a commission payment. The “dealer” is in essence. supplier salary from supplier.

since it is predicated on contractual arrangements between the dealer and the supplier. This dealer margin is defined as the pump price (ex-tax). who would typically charge a lease fee to the dealer for the use of the facility lessee typically the lessee. and sells at the posted pump price. dealer-established retail price. and means of compensation dealer dealer dealer 45% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee or Independent outlets are the only modes in which a true dealer margin exists. and sells at the posted pump price. Control of Pump Price Dealer Compensation dealer dealer buys product from the supplier. The dealer buys the petroleum product at a Dealer Wholesale price and in turn resells to the motorist consumer at a higher. and has control over the retail pump price. the retail facilities are owned by the dealer. The dealer pays most or all of the expenses associated with operating the outlet. MJ ERVIN & ASSOCIATES 27 . who may pay the supplier a lease fee for the use of merchandising space 14% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Independent Dealer EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In this mode. and means of compensation supplier. unlike rack or pump prices. This Dealer Price. The margin between these two prices is the dealer’s gross revenue. not the supplier. less the Dealer (wholesale) Price charged by the brand supplier.product from the supplier at a “Dealer Wholesale” price. The distribution of retail outlets by mode has some important implications concerning the nature of gasoline pricing and competition. Control of Pump Price Dealer Compensation lessee lessee buys product from the supplier. The margin between these two prices is the dealer’s gross revenue. and in turn resells to the motorist consumer at a higher pump price established by the lessee. can vary considerably from one supplier to another.

The remainder represent one of over 50 different marketer organizations. It therefore follows that no single oil company has a position of absolute dominance over the Canadian retail gasoline sector. or Imperial Oil). Therefore: Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada1. Figure 7: Outlet Representation by Mode 16000 14000 12000 10000 8000 6000 4000 2000 0 Total outlets Major integrated Others 2235 3821 Company Operated Commission Dealer Lessee Independent 2022 9 2061 1059 Company Op 2226 1760 963 2298 6435 4137 source: Octane Magazine Outlet Throughput A key measure of outlet performance and viability in the downstream industry is the monthly or annual outlet throughput of petroleum products. and fully two-thirds operate as lessees or independents. who themselves establish pump prices. This is significant: dealers who operate as lessees or independents are directly responsible for deciding upon the retail pump price. some general figures are mentioned here. It follows that pump prices tend to be somewhat more directly controlled (ie: at the local community level) in smaller markets than in larger markets. MJ ERVIN & ASSOCIATES 28 . While a complete discussion of average throughputs in typical Canadian markets will take place in part D of this study.Figure 7 shows that of all retail outlets in Canada less than half operate as company or commission dealers. This further limits the direct influence that a major oil company might have upon the Canadian retail marketplace. Roughly half of all retail outlets in Canada represent a major integrated oil company (Shell. In addition. There is some evidence that there is a higher percentage of lessee and independent outlets in smaller markets than in large population centres. virtually none of the major integrated outlets are company operated. Petro-Canada. during a price war) as previously described. 1 Unless the dealer is under a price support arrangement (for instance.

feature both a large-area convenience food store and a modern car wash facility.a result of significant retail outlet rationalizations (see Figure 5) which the petroleum products industry has undertaken. In effect. Improved outlet revenue from ancillary operations has caused. In fact. Many outlets have more than one ancillary offering: many “flagship” outlets for example. the revenue from so-called ancillary services is an increasingly essential element of retail gasoline marketing. Figure 8: Outlet Representation by Service 4000 3000 2000 1000 0 Car Wash CStore Kiosk Propane Service Bays source: Octane Magazine MJ ERVIN & ASSOCIATES 29 . ancillary service has had the consequence of subsidizing the pump price of gasoline. Ancillary Services Very few if any retail gasoline outlets limit their product offerings simply to gasoline. These improved outlet throughputs have provided for improved petroleum revenue potential. average annual throughputs ranged from under 1 million litres in smaller population centres.While an average outlet throughput may be in the order of 2. and is a result of. to over five million litres in major markets such as Toronto. Most ancillary services are operated by the dealer/lessee. The proliferation over the past two decades of ancillary services such as convenience stores and car washes. has had a profound effect on the retail gasoline marketing sector. Figure 8 depicts the Canadian representation of several key ancillary services. Based on a sampling of outlets surveyed in this study. which in part has led to a reduction in retail product margins. reduced petroleum margins. more fully described in part C. these study findings show that this can vary widely from market to market. who may pay the supplier (who is typically the owner of the facility) a lease or franchise fee for the use of the retail space. Canadian throughputs have dramatically improved in the past several years .5 million litres.

Regional and market-to-market comparisons are presented in greater detail in part D. Since rising prices are common to most consumer goods and services. An “all markets” average. the “Canada average” price reflects an average of urban markets only1. prices are for regular unleaded (RUL) gasoline. would be somewhat higher. and with which the reader should be familiar. including smaller markets. This part examines broad trends in several areas. This shows that pump prices have increased in nominal terms. an examination of the specific historical record of gasoline prices is useful. when the Persian Gulf War caused crude prices to increase significantly. using a Canada 10city weighted (by provincial demand) average.Part C Historical Trend Analysis This part of the study examines several historical price and margin trends in the Canadian retail gasoline sector. Unless noted. As such. MJ ERVIN & ASSOCIATES 30 . as can be seen in part D of this study. many utilize terms which are explained in part A. in nominal (actual) and constant (inflation adjusted) dollars from 1986 to 1995. Since 1 Data is not regularly collected on smaller markets. mainly using Canada average values. Figure 9: Annual Gasoline Price (Cents per Litre) 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 source: Natural Resources Canada / Statistics Canada Figure 9 shows the Canadian 10-city average regular gasoline pump price. particularly around 1990. While some of the presented findings are selfexplanatory. Gasoline and the Consumer Price Index A common perception among consumers is that gasoline prices are steadily rising.

there appears to be little or no lead or lag in the timing of rack price fluctuations relative to crude price changes. retail pump prices were about 7 cents less in 1995 than they were in 1986. When compared to other consumer goods. MJ ERVIN & ASSOCIATES 31 .Selected Goods & Services 180 170 160 150 140 130 120 110 100 90 80 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Gulf War pushes crude oil prices upwards in 1990-91 Annual Averages. fluctuations in average pump prices (ex-tax) have closely followed changes in underlying rack prices. gasoline prices have had a mitigating effect on the Consumer Price Index (commonly referred to as the CPI or inflation rate). as in Figure 10.1990. In constant dollars. rack price. both nominal and constant dollar prices are less in 1995 than in 1986: the constant dollar price of gasoline declined by 10 cents per litre from 1986 to 1995. and there appears to be no lead or lag in the timing of pump price fluctuations relative to rack price changes. When pump prices are reduced by the amount of tax content. It also depicts the associated margins. 1986 = 100 Source: Statistics Canada Cat 62-010 Domestic Water Domestic Electricity Alcoholic Beverages Auto Repairs All Items Gasoline Fuel Oil Food Natural Gas Telephone Service source: Statistics Canada Key Price History Figure 11 depicts the history of Canada (10-city) monthly average regular gasoline pump prices. Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years. Several observations can be made from this: • • • • fluctuations in average rack prices have closely followed changes in underlying crude costs. Figure 10: CPI Index Comparison . ex-tax equivalent prices. and relative crude cost. nominal pump prices decreased. as defined in part A of this study.

Figure 12 shows that industry margins have not been constant over time. it simply passes on a fixed cost margin to determine the “correct” pump price. then one might expect margins to be quite constant over time. and the rise in the tax content. In fact. nor do rack prices exactly follow crude costs. Margin History While Figure 11 provides an indication of key price trends. and have risen slightly since 1994. This recent rise in pump prices is attributable to two factors: • • the rise in crude costs in this period. It is important to state that pump price changes do not occur in exact lock-step with rack prices. as the next section shows. that is. as Figure 11 shows. If.Figure 11: Monthly Prices 1990-1996 (Nominal $) 70¢ Pump Price (Canada Average) 60¢ 50¢ Cents per Litre Pump Price excluding tax Tax Content 40¢ Rack Price (Canada Avg) Downstream Margin 30¢ Marketing Margin 20¢ Refiner Margin Crude Price 10¢ Jul-90 Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-96 source: Natural Resources Canada From these observations. the downstream industry operates on a “cost-plus” basis. MJ ERVIN & ASSOCIATES 32 . and in fact have displayed a declining trend over the past six years. it is also useful to examine the behavior of margins. From Figure 11 it can be seen that urban retail pump prices declined somewhat from 1991 to 1994. the presence of these additional market factors have operated to the benefit of consumers. which in turn. as might be suggested. are principally a reflection of changes in the underlying price of crude oil. which are defined by the price points. due to additional market factors which affect pump and rack prices at any given point in time. as shown in Figure 12. the following is evident that: Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products.

Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack .crude) 5¢ Marketing Margin (retail . This shows that on a monthly basis. MJ ERVIN & ASSOCIATES 33 . the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. The decline in refiner and marketing margins has both resulted in. In particular. A more thorough discussion of specific market factors for these and other centres appears in part D. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. Figure 13 is a comparison of regular gasoline gross marketing margins from 1991 to 1996 for selected centres. the actual fluctuation is much more pronounced than shown.Figure 12: Monthly Margins 1991-1996 (Nominal $) 30¢ Tax Content 25¢ 20¢ Canada Avg. since the chart is based on monthly averages. including: • • • improved refinery efficiency as a consequence of plant rationalization and a modest demand increase. several factors. improved retail outlet performance as a consequence of higher throughputs due to outlet rationalizations (closures) and demand increases. the gross marketing margin can fluctuate quite significantly1.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs. while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre. as local competitive factors act to self-regulate pump prices. Finding 13: From 1991 to 1996. which have both shown a consistent decline throughout the period 1991 to 1996. compared to the Canadian average. and has been a result of. not weekly or daily data. this upward trend is not attributable to “downstream” refiner or marketing sector margins. 1 In fact.

Selected Centres 16¢ HALIFAX Canada Average 12¢ Price per litre 8¢ 4¢ 0¢ CALGARY TORONTO HALIFAX Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 (4¢) source: Natural Resources Canada (pump price inputs) & Bloomberg OBG (rack price inputs) Canada vs. resulting in significantly higher Canadian gasoline prices. On an ex-tax basis. This difference accounts for most. US pump prices. Figure 14: Canada / US Monthly Pump Price (Nominal $) 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Apr-95 Apr-96 Oct-94 Oct-95 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada MJ ERVIN & ASSOCIATES 34 .Figure 13: Monthly Gross Marketing Margins. although Canadian pump prices in urban markets are clearly higher than in the US. is presented in Figure 14. Canadian pump prices have been roughly equal to. A comparison of Canadian and US regular gasoline pump prices. This shows that. this is wholly attributable to the difference in taxation. if not all of the difference in pump prices between Canada and the US. with and without tax. or even less than. US Price History The retail gasoline tax structure in Canada is vastly different than the US. for several years.

Canadian consumers do not experience any retail gasoline pump price disadvantage to their US counterparts. trading at any given time within a relatively narrow (about 2 cents per litre) range. RFG has not been introduced to Canadian markets. when compared on an ex-tax basis. there are likely some differences in the competitive dynamics in US markets compared to Canadian markets. and moving up or down more or less in unison.Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US. • Although this study shows that on an ex-tax basis. Canadian ex-tax pump prices were historically somewhat higher than in the US. largely as a result of two factors: • Canadian marketing margins have decreased in this period. Figure 15: Monthly Rack Prices: Selected Markets 31¢ 29¢ TORONTO SEATTLE (Cdn ¢/l) 27¢ VANCOUVER WINNIPEG Price per litre 25¢ 23¢ 21¢ BUFFALO (Cdn ¢/l) 19¢ 17¢ 15¢ Jul 93 Jul 94 Jul 95 Apr 93 Apr 94 Apr 95 Jan 93 Jan 94 Jan 95 Jan 96 Oct 93 Oct 94 Oct 95 Apr 96 Jul 96 source: Bloomberg Oil Buyers’ Guide / Natural Resources Canada MJ ERVIN & ASSOCIATES Oct 96 35 . This is no longer the case however. page 24) and somewhat increased demand. which is reflected in US average pump prices. Rack Price History The behavior of rack or wholesale prices provides an indication of the degree of competition among refiners. Figure 15 compares these values for selected Canadian and US centres over a period of several years. as a result of outlet closures (see Figure 5. From this it can be seen that Canadian and US rack prices. behave in a very similar fashion. The introduction of Reformulated Gasolines (RFG) into some US markets has caused prices to rise. Canadian outlet throughputs (although likely still less than those of the US). While these trends have also occurred in the US. have improved considerably. This would be a useful area for further research. Prior to 1994. both a cause and an effect of improved throughputs and ancillary revenues as previously described.

Gasoline demand exhibits a very regular seasonal pattern.000 Jan-91 14¢ Jan-92 Jan-93 Jan-94 Jan-95 Ex-tax Pump Price (Canada avg. any given Canadian or US rack point cannot successfully price its wholesale product substantially higher than that of any other rack market in continental North America.300.000 2. Pump Price (nominal ¢/litre) 3.That Canadian rack prices are so closely tied to those of the US is strong evidence of the interdependence of these two macro-markets.000 2. compared to average ex-tax regular gasoline pump price for the same period. albeit less distinct pattern. conditions begin to favour a “seller’s market”.900.700. Yet in the latter half of each year. as demand ebbs and inventory improves.000 24¢ 1.000 34¢ 2. a “buyers market” develops. the price tends to be bid upwards. Gasoline price exhibits a similar. Such a pattern is sometimes perceived as evidence of refiner or supplier “price gouging”. As non-refiner marketers attempt to secure a supply of this diminishing inventory.000 1. not only in a given market. Demand vs. and falling in the latter half of each year. and as would be expected in any commodities market under these conditions. To do so would invite the inevitable consequence of rack customers themselves sourcing their product needs from the rack point that offers the lowest price (plus freight expense).900. of motor gasolines from 1991 to 1996. Figure 16: Monthly Demand vs.700. Simply put. rising and falling closely in step with demand. Price History Figure 16 shows the history of Canadian gasoline demand. or sales.500. and prices tend to fall. This phenomenon actually illustrates the essence of how competition in the petroleum industry operates to self-regulate the price of gasoline: The rising demand for gasoline which occurs every spring has a diminishing effect on product inventories.100. per litre) 12 Month Moving Average 19¢ 29¢ 44¢ Monthly Demand ('000's litres) 39¢ source: Statistics Canada (demand) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 36 .000 2.500.000 1. but in fact across the North American continent (US demand follows a similar pattern).000 2.100. increasing significantly every spring. or indeed anywhere.

All of the findings suggest that. their related product costs and margins. which ensures a competitive product price for buyer and seller alike. so do prices. This part of the study presented a number of historical views of retail gasoline prices. gasoline prices have not followed the traditional model. On a long-term basis however. and this is clearly demonstrated in the case of gasoline prices on a seasonal basis. price fluctuations at the rack (and consequently at the pump) are a simple reflection of buyers and sellers alike. the essence of a free market economy. The traditional supply-demand model predicts that when demand rises. has operated in a highly competitive environment. competing to meet their own needs. and product taxes which add to the consumer price of gasoline. demand rose approximately 8. MJ ERVIN & ASSOCIATES 37 . Figure 16 shows that from 1991 to 1995. This is of course. and it can be seen to operate as effectively in the Canadian petroleum products industry as it does in any open market. while world crude prices and Canadian taxes have generally increased over the past several years. a feature of most marketregulated commerce. Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels. The next part of this study will undertake a comparative perspective: examining pump price and margin differences that exist between individual markets within Canada. which consists of the refiners and marketers of gasoline and other petroleum products. as evidenced by declining industry margins. pump prices have increased due to a significant rise in crude costs in this period).3%. while average ex-tax pump price declined by 14% (since 1994. in that prices have fallen. despite a rise in demand.Whether in the spring or the fall. the downstream petroleum industry.

margins and related implications for market competitiveness than can simply be provided by existing public-domain data. although one was subsequently dropped due to insufficient submitted data. outlet costs. ancillary revenues. and a more detailed examination of price. which relates solely to that sector of the petroleum industry directly involved in using pump price as a competitive tool. Nineteen markets were therefore adopted for the study (Table 3). and in order to provide insights into the range of competitive dynamics that may exist.. and pump prices alone provide very little opportunity for “comparability”. play a role in a market’s pump price. These “outside factors” tend to obscure the more relevant aspect of pump price. outlet volumes. Part D of the study therefore has two main objectives: • an examination of a diverse array of markets in order to determine the degree of similarity or dissimilarity between them. • Methodology Selection of Markets A number of markets were selected for the study. MJ ERVIN & ASSOCIATES 38 . freight. A number of factors such as taxes.Part D Selected Markets Study Introduction A review of public domain data on current and historical prices as presented in part C. namely product margin. but contains two inherent limitations: • • data is drawn exclusively from major Canadian centres. is useful in providing broad overviews of industry price and margin trends. etc. there is no regular monitoring of pump prices in smaller centres. so that a broad range of the following criteria was represented: • • • • • population proximity to refinery proximity to primary supply point proximity to US border proximity to other retail markets Twenty markets were initially selected by the committee.

and Quebec/Atlantic) and market size: Group A markets included population centres in excess of 500. This study compiled both sets of financial data in order to produce a net revenue/cost per outlet picture which eliminated the effect of mode differences. and for smaller markets. or “rack to retail” sector.and consequently competitiveness . the gross marketing margin must be examined in isolation from those other variables. To this end. Table 3: Selected Study Markets Total (19) Group A (8) BC/PR (9) Vancouver* Victoria White Rock Calgary* Winnipeg ON(4) Toronto Ottawa* QU/AT (6) Montreal* Group B (11) Nanton AB Peace River AB Regina* Thompson MB Sault Ste Marie* Sioux Lookout Chicoutimi* Gaspé Saint John NB* Charlottetown Halifax * forms part of ancillary revenue and cost analysis Sources of Data In order to conduct a detailed study market analysis of retail marketing operations. both the dealer and the product/brand supplier realize revenue and incur costs associated with an outlet. retail outlet and brand representation. retail pump prices .. the gross marketing 1 Although White Rock is clearly not a major centre by itself. Petro-Canada. In addition. and Canadian Tire Petroleum. Process Overview As illustrated in part A. Five companies responded to this request: Imperial Oil. member companies of the Canadian Petroleum Products Institute (CPPI) were approached to provide detailed outlet operating petroleum and ancillary revenue and cost data2 for a random sampling of outlets in each of the selected study markets. price history data not available through public sources. its situation in the Greater Vancouver Regional District placed it in the category of a Group A market. these organizations provided market-level data on freight costs. Shell Canada. Furthermore.Each market was classified according to regional affiliation (BC/Prairie. Suncor Inc. and Group B markets less than 500. 2 Depending upon the outlet mode. In all. MJ ERVIN & ASSOCIATES 39 . Ontario.000. To examine the competitiveness of the marketing.are influenced not by one.0001. confidential data were collected and independently evaluated on 481 retail gasoline outlets in 19 Canadian markets. it was essential to obtain data not normally available through existing public sources. but a number of variables.

average outlet annual throughput was determined for each market. 3. Group B (smaller market) and 19-market study averages. For each market. and the final “rationalized” gross product margin was determined for each market. Where differences in gross product margin might still exist. This allows for an accurate determination of net outlet revenue. Finally. weighted by sales demand. Where applicable. this study postulates that average outlet throughput in each market may be a significant factor affecting margins and prices. to arrive at “blended” values2. Using the derived gross product margins and volumes for each market. these were weighted by volume. as the “blended” price includes other product grades. including some smaller centres. Gross product margins are therefore compared to corresponding volumes to determine if a cause-and-effect relationship exists. the study postulates that outlet operating costs and revenues from ancillary sources (such as convenience store sales) might affect how the dealer establishes competitive pump prices. tax content. Values were weighted by market population using 1991 Statistics Canada census data in order to determine Group A (major urban). Process Description Figure 17 shows an overview of the process used to reduce the study market 1995 pump prices into its sub-elements: Figure 17: Study Market Methodology PUMP PRICE 1 EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE FREIGHT TAX OUTLET VOLUME 3 PRODUCT MARGIN 5 REFINER MARGIN UPSTREAM 2 6 7 DEALER PROFIT MARKETING COSTS MARKETING PROFIT ANCILLARY REVENUE PETROLEUM REVENUE PER OUTLET OUTLET COSTS 4 PETROLEUM REVENUE PER OUTLET CONSOLIDATED NET INCOME PER OUTLET OUTLET COSTS 1. From participant company supplied data. rack price. The variables of tax content.margin is stripped of its freight component. in addition to operating cost and ancillary revenue data gathered in the study1. The gross product margin thus serves as an interim basis for comparing study markets. a market-by-market profile of outlet income is presented. rack price. 1995 average values were determined for pump price. MJ ERVIN & ASSOCIATES 40 . to derive the 1995 average gross product margin for each of the study markets. 2. and freight were successively removed from the pump price. 2 Accordingly. by product grade. and freight. average pump prices are higher than actual average regular gasoline prices. a broad representation of markets was possible. 1 Although outlet cost and ancillary revenue data was not available for all markets.

7.. 5.. these 19 markets represent a combined population base of 8. . and gross product margins are therefore likely to be understated. Since actual wholesale prices (using transfer or contract prices) are not available in the public domain. or consolidated net incomes.. and accordingly represent a broad spectrum of consumers and marketers. freight. While clear. Unlike retail pump prices however. Bloomberg rack price values were used as the assumed wholesale price. In referring to marketing margins. accurate comparisons are possible. as described on page 10. also considering that RUL constitutes the majority of product. A dollar-per-outlet estimate of these elements was made. it is important to understand that the use of rack price in this analysis has certain implications.. etc. product margins. When these margins are applied to outlet throughputs as in step 4 above. marketing margin. and outlet operating costs were deducted from total revenue. Wholesale refined product prices used in this study are therefore likely to be overstated. average revenues from ancillary services were added. Use of Rack Price The derived value of retail gross product margin is essentially based upon two price points: pump price and rack price. 6. The derived weighted average values of pump price. and from one brand to another. represent a broad range of markets. objective data exist for both of these values. The resultant consolidated net revenue per outlet was examined in terms of its component elements of Dealer Income.7 million. Rack prices used in this study are taken from Bloomberg Oil Buyers’ Guide™. From participant company data. Also. but they are relatively minor. These differentials do vary from one market to another. and supplier profit.. This value was then applied to the gross product margin to determine average outlet petroleum revenue. the rack price basis results in petroleum revenues which are understated to a somewhat greater degree in high throughput markets than they are in low throughput markets. so that on a cents-per-litre basis. and therefore where assumptions were made. perhaps by 1 to 2 cents per litre. including relatively smaller ones such as Sioux Lookout or Gaspé. encompassing a significant portion of the entire Canadian market. Interpretation of Data In some smaller centres.4.to determine average consolidated net revenue per outlet. Supplier Overhead costs. a recognized source of data on world crude oil and petroleum markets and prices. the Bloomberg rack price is used as the defining wholesale price point which differentiates between the refiner and marketing sectors. many wholesale petroleum purchases are made at less than the “posted” rack price. This variation is constant across all nineteen markets however. MJ ERVIN & ASSOCIATES 41 . the effect on the “blended price” is small. petroleum revenues. grade differentials were based on known differentials of nearby markets.

38 cents per litre in ex-tax pump price. while lower prices tended to prevail in major centres. accurate. MJ ERVIN & ASSOCIATES 42 . Study Market Findings Posted Pump Price Figure 18 shows 1995 average retail pump price (using a “blend” of gasoline and diesel grades) for each of the 19 study markets. The data also shows that typically. higher priced markets are associated with smaller population centres. Figure 18: 1995 Average "Blended" Pump Price 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Price per Litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River On the basis of posted pump prices. Several variables beyond the control of the retail gasoline sector are incorporated into the pump price however. broken into tax and extax components. Tax Figure 19 shows posted pump prices for the study markets.Rack prices used in this study are nevertheless market-driven.8 cent difference in pump price 1 See footnote at Appendix II. table J for an explanation of how variance is derived. The data shows a statistical pump price variance of over 17 cents per litre within this study group. The first of these variables to be examined is tax. independently gathered data. and these tend to interfere with an objective comparison of fundamental competitive differences which may exist. and based on objective. The study data suggests that variations in tax rates account for a significant part of pump price differences. The 19-market study group exhibited a statistical variance1 of 17.64 cents per litre in pump price. A 6. there is little to suggest why such a high variance exists. but a variance of only 12.

The data shows that taxation between markets within the same province varies little.tax. it is therefore more useful to use ex-tax pump prices when comparing any two markets. while taxation between provinces is more pronounced . or when examining historical price trends. additional elements of the revenue stream must be further isolated. MJ ERVIN & ASSOCIATES 43 . Figure 19: Pump Price . taxes were a significant element of pump price. as described in part A.75 cents per litre (Vancouver. 1 Due to pump price differences.while all markets are subject to the same rate of federal excise tax and GST1. when examined on an ex-tax basis. namely the upstream industry and refiner sector. Since the level of taxation is clearly a factor which is beyond the control of the petroleum industry. provincial tax rates can vary greatly. but the variance is minimal .less than one-half cent per litre.between Calgary and Vancouver for example. Montreal). This eliminates any effect that tax variability may have. GST content can vary by market. Upstream and Gross Refiner Margins Although the deduction of tax content is useful. was less than three cents. thus providing a better basis for comparison. ex-tax elements 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Cents per litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Tax 95 Blended Extax Price Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences. accounting for roughly half of the average retail price. the resultant ex-tax pump price nevertheless represents a gross margin for the entire oil industry. Average 1995 taxation within the study group ranged from 22 cents per litre (Nanton) to 28. As this study seeks to isolate the marketing or “rack to retail” sector as a competitive entity. In all study markets.

rack and pump prices. MJ ERVIN & ASSOCIATES Cents per litre 44 . Freight costs are additional. and their respective margins. as is examined below. the rack price is set at the rack point (Winnipeg.Since the refiner’s rack price incorporates the raw material cost (crude price) plus the “value-added” element of refining. are clearly delineated by market-driven crude. The figure shows that combined gross Refiner/upstream margins are relatively uniform among the study group. it should be restated that each of these sectors. as this would cause rack buyers to bring product in from the lower-priced region . Figure 20 shows ex-tax pump price isolated into its upstream/refiner (ie. When rack price is deducted from the ex-tax pump price. and therefore are best analyzed separately. Figure 20: Ex-Tax Pump Price Elements 40¢ 95 Retail Marketing Margin 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Rack Price As many petroleum marketers are also involved in crude oil production and product refining. the resultant gross marketing margin represents that portion of the pump price model which relates solely to the retail marketing sector. but ultimately. in the case of Thompson). To address this. This is due to the fact that for any market. rack price) and gross marketing margin elements. reflecting some differences in refinery crude acquisition costs. reflecting the reality that at the rack level of competition. Furthermore. the dynamics of (marketing) retail pump prices are quite distinct from those of (refiner) rack prices.assuming transport costs did not outweigh the price difference. differ little from those of major centres. It can also be seen that upstream/refiner margins for remotely located markets such as Thompson MB. one region cannot maintain rack prices at a higher level than another. the validity of analyzing gross marketing margins in isolation might be raised. the rack price is equivalent to the upstream margin plus the refiner’s margin. if a clear understanding is to be achieved.

generally smaller markets. Although freight operations are often an integral part of many petroleum marketing operations. particularly in comparisons of major urban markets to small.3 cents per litre. this freight cost is almost negligible. It is axiomatic that remote markets incur higher freight costs than those located close to the source of supply. with their component freight costs. as low as 0.0 cents per litre. For other. it is essentially a “non-core” business. most Canadian marketers contract out at least some of its product distribution needs to third party cartage companies. remote population centres.Gross Marketing Margin and Freight Cost The gross marketing margin provides for a useful comparison of revenue streams available to the retail gasoline marketing sector. Figure 21: Gross Marketing Margin Elements 20¢ 15¢ Freight Cost 95 Retail Product Margin 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Elimination of the freight variable reduced the study group’s statistical variance from 13. Figure 21 shows a study market comparison of gross marketing margins. the data shows that freight is often a significant part of the gross marketing margin. To provide a comparative view of the marketing dynamics within the study group. one final outside variable must be isolated: that of product freight. MJ ERVIN & ASSOCIATES 45 . it is therefore important to eliminate the freight variable from the gross marketing margin. Finding 17: Market-specific differences in product freight are a key factor in inter-market ex-tax pump price differences. Two of the study markets had freight costs in excess of 3.49 cents per litre (gross product margin). Before using this as an analytical tool however. resulting in comparative gross product margins. in fact.16 cents per litre (gross marketing margin) to 7. For markets which are also established as rack points. and therefore a significant pump price factor.

6 cents) to the variance in their component gross product margins (7. as the 3. MJ ERVIN & ASSOCIATES 46 .5 cents).the gross revenue available to the petroleum marketing sector for its operations. petroleum revenues.17 cents per litre. Gaspé.22 cents per litre Smaller markets showed a wider variance in gross product margin . at 3.Retail Gross Product Margin Figure 22 provides a comparison of the original pump price for each study market.06 cents per litre.6. Group A (larger population) markets averaged 5.5 cents per litre average Gross Product Margin cited in Part B. to the resultant retail gross product margin . at 14. was the lowest. was the highest of the study group.68 cents per litre.95 cents per litre. For all study markets. Bloomberg rack price values were used as the assumed wholesale price. while Toronto. whereas the study market result cited here incorporates all gasoline grades and a broad variety of population centres.5 cent variance in gross product margin is still significant however. or between any two regions. it is evident that the non-industry factors of taxation and freight cost are partly responsible for pump price differences between any two markets. A 7. product margins. In referring to marketing margins. 1995 gross product margin averaged 5.a variance of only 2.68 cents per litre1. or consolidated net incomes.42 cents per litre. The study revealed that: • • Retail gross product margins differ very little between major urban markets . Figure 22: Petroleum Gross Product Margins 70¢ 60¢ 95 Retail Product Margin 95 Blended Pump Price 50¢ 40¢ 30¢ 20¢ 10¢ 0¢ Victoria Vancouver White Rock Winnipeg Calgary Nanton Regina Toronto Ottawa Sioux Lookout Chicoutimi Saint John Thompson Peace River Montreal Halifax Gaspé Sault Ste Marie Charlottetown When comparing the variance in pump prices within the 19-market study group (17. which suggests that there may be an additional factor which is responsible for pump price 1 This is considerably more than the 3. while Group B markets averaged 7.5 cent per litre average relates to regular gasoline in major markets.

If these two factors are related to each other as they are in Figure 24. 3.000. it would likely be so unprofitable as to be un-viable. Figure 23: Average Annual Throughput per Outlet 6.000.000.2 cents per litre in Gaspé. This study’s data shows that the range of volume performance among outlets within a given market is relatively narrow.000 5. vs. Figure 23 shows a similarly wide range of variability in average throughput per retail outlet within these same markets. Indeed.000 0 Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Relationship of Gross Product Margin to Outlet Throughput Figure 22 shows that.differences between markets.000 litres per year (Sioux Lookout) to over 5. sold significantly less than 5 million litres of petroleum per year.000 litres per year (Toronto). if any retail gasoline outlet located in the Toronto area for example. a wide range of variability still exists between markets in the study group .000 1.14. To understand why such a wide range of margins can exist after eliminating all tax and freight variables. for example. an examination of related outlet throughput volumes is necessary.000.000 Litres 3.1 cents per litre in Toronto.000 2. Outlet Throughput Figure 23 shows average annual outlet throughput (sales volume) for the study group.000.000 4. once isolating retail gross product margin from all of the “outside” pump price factors.000. ranging from under 700. a distinct relationship between product margin and outlet throughput emerges: MJ ERVIN & ASSOCIATES 47 .000. A wide range of volume performance is evident.

all market groups (BC/Prairie. Gross Product Margin 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 16¢ 14¢ 12¢ Gaspé Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4. With few exceptions. while those with high Gross Product Margins tend to have low outlet throughputs.000 2.95 cents). Ontario.6624 1.000.7 million respectively. the Group A market outlets had roughly 50% more throughput than Group B outlets .Figure 24: Outlet Volume vs.000 Halifax Montreal 0¢ That such a relationship would exist is understandable: with the same margin. On average however. If all outlets in a given market experience generally low throughputs.000 3.000.962 R2 = 0. Smaller markets perform as competitively as larger centres.000.000. not of poor competition. an outlet with low throughput would derive less petroleum revenue than a high-volume outlet. Regionally.that is. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance. they remain essentially the same regardless of volume changes . It can be seen from Figure 25 that major centres (Group A) generally experience smaller retail gross product margins (5. This analysis of outlet throughput and gross product margin by market leads to one of the more significant findings of the study: Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes.000 5.000.000 6. the 19 study markets exhibit a high degree of uniformity of gross product margin as a function of outlet throughput.000. compared to 2.6634Ln(x) + 76.4 million litres annually.42 cents) than smaller (Group B) population centres (7. Although MJ ERVIN & ASSOCIATES 48 . As most outlet operating cost are fixed in nature .a low volume outlet would be much less profitable than one in the same market with significantly higher volumes.000 Volume (litres) 4. it follows that higher gross product margins will be the consequence. and Quebec/Atlantic) exhibit a close adherence to expected margins based on throughput.

Regional & Urban Groupings 18¢ 16¢ 14¢ 12¢ 10¢ 8¢ Group B markets QU/AT markets BC/PR markets Group A markets Ontario markets All study markets 6¢ 4¢ 2¢ 0¢ 1. supplier overhead costs. and incur many expenses in the course of their commerce.000. These additional factors clearly have an effect on the relative competitiveness of retail markets. and must be examined. Ancillary revenues are those derived from non-petroleum sales sources.000. Figure 26 summarizes total outlet petroleum sales. product cost. It represents the residual revenue which is available to the dealer and to the supplier. and supplier MJ ERVIN & ASSOCIATES 49 .000 5. outlet-based view of retail markets. car wash. Figure 25: Outlet / Volume Relationship . while operating costs are those costs which are directly incurred in the operation of the retail facility. competitiveness occurs between retail outlets. which. ancillary sales.Quebec/Atlantic markets appear to experience higher margins (and smaller throughputs) than other regions. Consolidated net revenue is the result of combining gross petroleum revenue (gross product margin times throughput) plus ancillary revenue (excluding cost of merchandise). such as convenience stores. averaged $69.716 .000 4. supplement their incomes with other revenues. In reality.the revenue available for dealer income.000 2. Consolidated Net Revenue per Outlet To create a complete. this is likely due to the higher incidence of Group B study markets within this region. which for the study group. two additional factors are introduced: ancillary revenue and outlet operating costs.000.000 Volume (litres) The examination of gross product margin as a function of outlet throughput provides a comprehensive and objective rationalization of inter-market pump price differences. in addition to petroleum sales.000. is only a measure of petroleum revenue per litre. less outlet costs. Gross product margin. and ultimately shows that very little difference in competitiveness exists between any two markets. and the resultant consolidated net revenue.000. as described below.000. however.000 6. and auto service.000 3.

A discussion of the ultimate distribution of this revenue is useful. Costs.$154. MJ ERVIN & ASSOCIATES 50 . In effect.000 per year respectively . reduced pump prices.000) $(200.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income The findings depict that some inter-regional differences in outlet net revenue exist. these ancillary operations contributed to a lower product margin and consequently. as explained below.000 $150.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50. $60. consolidated net revenue is the residual revenue which is available to the dealer and to the supplier.000) $(250.000 $50.000 $200. Most markets showed relatively similar net revenues (see Appendix II. Dealer and Supplier Profitability Consolidated net revenue represents the source of cash flow for three distinct purposes: • dealer income/profit: the return or salary to the dealer. petroleum sales revenues alone were insufficient to cover operating costs for the 481 individual outlets studied.000) $(350. petroleum revenues alone are insufficient to offset the operating expenses associated with retail petroleum outlets.000) $(100. Although outlets in smaller (Group B) markets had higher outlet consolidated net revenues than major market outlets .000) $(150. Table K).000 vs. which reflects his investment in the outlet.Group B outlets were not as profitable as these revenue values might suggest. Finding 19: Based on published rack prices. An examination of these component elements reveals a significant finding: that for most markets.profits.000 $250. and his personal labour investment.000 $100. Figure 26: Outlet Revenues. Income BC/PR $300. As described above. causing the weighted average for Quebec / Atlantic to be depressed). although these differences are somewhat overstated (market data for Montreal showed particularly low net revenue.000) $(300. The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations.

supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. These costs would include salaries of marketing representatives and management, brand advertising, corporate charity, sales processing, head office and regional office overheads, etc.. supplier profit: after the above costs are allocated, the residual revenue is available as profit to be re-invested into retail operations, and/or distributed to shareholders.

Although ideally, this study would quantify each of these values, there are no clear, objective means to do so. In particular, the measurement and subsequent allocation of supplier overhead costs on an outlet-by-outlet basis is an inexact science, at best. This study therefore provides an estimate of these values, as shown in Table 4.

Table 4: Estimated Cash Flow from Consolidated Net Revenue
All Study Market Avg. Consolidated Revenue (data supported) comprised of (estimated): Dealer Income Supplier non-outlet Overhead Supplier Residual Profit $32,000 $52,000 $(14,000) 0 to $60,000 $30,000 to $70,000 $(30,000) to $150,000 $70,000 Estimated Range ($15,000) to $220,000

note Supplier overhead estimates are based on MJ Ervin & Associates research data not directly related to this study.

Despite the fact that these table values are estimates, the values, and the supplier residual profits in particular, are believed to be a reasonable assessment of the state of retail profitability in Canadian retail petroleum markets. Accordingly, in 1995, a typical retail outlet is estimated to have returned a net loss to the supplier in the order of $14,000, using Bloomberg rack prices as the cost basis. Finding 20: For the 481 individual outlets studied, after the average 1995 outlet revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements, the residual represented a net loss to the supplier. Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads, residuals for outlets not studied may be better. This may contradict other indications that 1995 in fact may have represented a profitable year for Canada’s major oil companies. This was unlikely to be as a result of retail marketing operations, however, and was more likely a result of other operations including upstream, refining, or petrochemicals. Also, non-refiner marketers, who did not contribute to the study database, may have realized somewhat better profitabilities than indicated here: it is likely that their dealer costs and supplier overheads are less than those of major oil companies. Nevertheless, this data illustrates an important finding:

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Finding 21: Based on published rack prices and the individual outlet data, the profitability of the 481 outlets studied appears only marginal. The viability of the Canadian retail gasoline sector as a whole may be somewhat better, given the possibility of discounts from posted rack prices and potentially lower overhead costs. Unlike the major market outlets, rural market outlets used in this study appeared to be somewhat more profitable. This may not be representative of rural outlets in general, however, since the 11 Group B markets were chosen for this study for some particular criteria, not necessarily to be “typical” small-population markets.

Market by Market Competitive Analysis
This section of the study provides a detailed market-by-market analysis of the 19 study markets for the purpose of illustrating some competitive dynamics that may exist in retail gasoline markets.

Explanation of Format
Each market commentary begins with a demographic overview as shown below, providing values and rankings for a number of parameters: • • • • • population - taken from 1991 census data, this is the population of the greater metropolitan area (census district) of each municipality. # of brands - number of brands, as reported by study participants. # of outlets - estimated number of outlets, as reported by study participants. outlets per 10,000 - number of retail outlets per 10,000 population. avg outlet volume/yr - average outlet annual throughput, based on participantprovided outlet data. Total market volume and total outlets were not used to derive this measure, as they are estimates only. 95 mktg mrgn - gross marketing margin, as defined in part A of this study. freight - freight cost per litre associated with transporting petroleum from the rack point to a typical outlet in the market. 95 prod mrgn - gross product margin, as defined in part A of this study. rank or rank* - ranking of the value within the range of study group values. Where an asterisk appears (*), rankings are lowest value = 1, otherwise highest value = 1. sample size - the number of retail outlets for which data was collected in this market.

• • • •

Where sufficient data exists, a historical record of relevant prices is shown in graphical form.

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Victoria
population # of brands # of outlets outlets per 10,000 299,550 12 106 3.54 rank 8 rank 9 rank 8 rank* 6 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,223,068 litres 6.89 ¢ 0.41 ¢ 6.48 ¢ rank 9 rank* 7 rank* 10 rank* 7

sample size 26

General: Victoria is a relatively major market, and its location on Vancouver Island presents some uniqueness with respect to supply. Geographic / Supply / Freight cost considerations: As Vancouver Island has no refinery, Victoria depends upon marine supply from the Vancouver mainland, or potentially from any marine source of supply in the Pacific Rim. This broad access to supply has occasionally allowed some marketers to purchase “spot” gasoline at relatively low rack prices, creating a short-term drop in pump prices. In the past several years, the rack market across Canada has grown more robust, such that all Canadian rack prices now follow those in the US very closely, and most Canadian markets now benefit from the same type of cross-border rack competition that Victoria had experienced. Influence of other markets: Due to its geography, consumers in this market are somewhat “captive” to the local retail gasoline marketers: no opportunity exists to drive to other markets to purchase retail gasoline on a casual basis. This had no apparent effect on the level of competition or price levels however, as described below. Price history / Taxation: Pump prices have historically been quite volatile, often at times when other markets have been quite stable, as described above. Victoria collects a 1.5 cents per litre municipal tax. Ex-tax pump prices are on average, very close to the Canadian 10city average. Margin/Throughput relationship (Figure 24): Victoria fell within a cluster of markets with similar margin/throughput relationships. Product margin was marginally less than expected for a market with these throughput characteristics. Consolidated net revenue: No ancillary or outlet cost data was available.

Figure 27: Victoria - Price History
60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢
Crude Oil Price Vancouver Rack Price Victoria Posted Price - ex tax Canada Average - extax Victoria Posted Pump Price RUL Canadian Average Posted Pump Price

10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Jan-92 Jan-93 Jan-94 Jan-95 Oct-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95

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38 ¢ 7.extax Canadian Average Posted Pump Price Vancouver Posted Pump Price RUL MJ ERVIN & ASSOCIATES 54 . Figure 28: Vancouver . This may explain the somewhat elevated gross product margin in this market. ranking 11th. as described below. Vancouver is also a terminal for a refined products pipeline from Edmonton. Low consolidated net revenues may have contributed to the higher margin. Overall. and also has local refining capacity. Margin/Throughput relationship (Figure 24): Gross product margin was slightly high. Influence of other markets: Although relatively close to the US border.98 ¢ 0.60 ¢ rank 4 rank* 9 rank* 9 rank* 11 sample size 37 General: As one of Canada’s major retail markets. contributing to a higher than average pump price.89 rank 3 rank 5 rank 3 rank* 2 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.Vancouver population # of brands # of outlets outlets per 10. Price history / Taxation: Pump and ex-tax prices have historically been somewhat higher than the Canadian 10-city average. while average throughput ranked 4th. this market has access to numerous refiners along the Pacific coast through marine supply.ex tax Canada Average . Consolidated net revenue: Vancouver outlets averaged the highest in both ancillary revenue and outlet operating costs.000 barrel per day plant located in the greater Vancouver area. Geographic / Supply / Freight cost considerations: As a port city. Vancouver collects a 4 cent per litre municipal tax. but well within a cluster of markets with similar throughputs. a 60. Vancouver provides several perspectives into retail marketing.000 1. The somewhat high margin placed this market slightly above. driving distances preclude most Vancouver consumers from routinely accessing this neighboring market.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Vancouver Rack Price Vancouver Posted Price . and with access to wholesale product by several means. net outlet revenues were less than those of other major centres.542.745 18 446 2.968 litres 7.658.

Margin/Throughput relationship (Figure 24): gross product margin was virtually identical to that of Vancouver. This market is close to its usual rack point. prices. This is likely due to the fact that unlike many smaller markets. Like Vancouver. the White Rock retail gasoline market displayed the same attributes as a major urban market. Despite its relatively small size.315 4 8 4. White Rock’s margin was typical of markets with similar outlet throughputs. price/competitive dynamics appeared to relate more to the influence of Vancouver than to any cross-border factors. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. This suggests that. due to its proximity to one. Geographic / Supply / Freight cost considerations:.90 rank 14 rank 17 rank 14 rank* 13 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.000 16. Price history / Taxation: Although no specific data is available.98 ¢ 0. and retail gross product margin was less than that of markets with a similar population base. gasoline “cross-border shopping” is less pronounced than might be expected. Freight costs were accordingly low compared to other small markets in this study. this market is subject to a 4 cent per litre municipal tax.53 ¢ rank 5 rank* 9 rank* 12 rank* 10 sample size 5 General: White Rock is situated on the lower mainland of BC. The reality may be that the immediate necessity of filling one’s gas tank may often preclude a cross-border trip. Average outlet throughputs were relatively high.630 litres 7. prices in this market have historically mirrored those of Vancouver.604.45 ¢ 7. adjacent to the United States border. White Rock is essentially part of a major market due to its proximity to Vancouver. Influence of other markets: Although this market is a border-crossing community. thus providing some unique characteristics for the market study.White Rock population # of brands # of outlets outlets per 10. but less than most markets with a small population base. at least in this market. the study data found little to suggest a material effect upon representation. MJ ERVIN & ASSOCIATES 55 . In all respects. Vancouver. or competitive dynamics.

Price history / Taxation: As the figure below shows.675 27 313 4.extax Calgary Posted Pump Price RUL Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 56 .4 rank 4 rank 3 rank 4 rank* 9 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. indicative of a strong competitive climate.47 ¢ 0.719 litres 6.ex tax Canada Average . Consolidated net revenue: was typical of other major markets in the study group. Figure 29: Calgary . Some smaller markets in the vicinity have occasionally priced below Calgary. Other considerations: Of the markets studied. Calgary had the third highest number of retail brands.000 710.827. This trend is largely due to a low provincial tax rate: when compared on an ex-tax basis. Margin/Throughput relationship (Figure 24): Gross product margin was very typical of other study markets with similar throughput characteristics.24 ¢ 6. on some occasions the Calgary ex-tax RUL pump price has dropped to within one cent per litre of rack price. Calgary is of sufficient size to support a viable rack market. Rack-to-outlet freight costs are among the lowest in the study group. creating some competitive pressures (see Nanton). Product is usually sourced from Edmonton refineries via pipeline. Geographic / Supply / Freight cost considerations: Although there is no refining capability within this market.Calgary population # of brands # of outlets outlets per 10.23 ¢ rank 3 rank* 6 rank* 3 rank* 6 sample size 69 General: Alberta enjoys the lowest provincial product tax rates in Canada. pump prices in this market have historically been well below the Canadian 10-city average. Indeed. Calgary pump prices are very close to the Canadian average. which was one reason for selecting Calgary as a study market.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Calgary Rack Price Calgary Posted Price . Influence of other markets: Calgary is fairly remote from US and other major markets.

Geographic / Supply / Freight cost considerations: Regina possesses its own refining capacity. supply/demand is likely more balanced. this market has generally exhibited pump prices which are somewhat higher than the Canada 10-city average. Freight costs were therefore low: Regina ranked first (least) in freight costs among the entire study group. Figure 30: Regina .Price History 65¢ Regina Posted Pump Price RUL 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ Crude Oil Price Regina Rack Price Regina Posted Price . it is likely that this reflected a surplus of wholesale inventory within the local market or region.000 179.794 litres 7. Since then.50 ¢ 0.extax Canadian Average Posted Pump Price 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 MJ ERVIN & ASSOCIATES 57 . which are among the highest in Canada.089.29 ¢ rank 10 rank* 8 rank* 1 rank* 8 sample size 30 General: With local refining capacity. price volatility has eased. Influence of other markets: Like Calgary. Although no supporting data is available. reflecting a somewhat higher than average gross product margin relative to the 10-city weighted average. and therefore experiences no particular influences from any other major market. Consolidated net revenue: was typical of other similar markets. and a history of volatile pump prices. Price history / Taxation: In the early 1990’s this market experienced frequent and pronounced price war activity. Ex-tax prices are also above average. Margin/Throughput relationship (Figure 24): Although gross product margin was high relative to major markets.180 15 86 4.Regina population # of brands # of outlets outlets per 10. This is partly due to provincial taxation levels. and this market is now more typical of other large population centres.ex tax Canada Average . Regina was of some interest as a study market. Since 1993. and is therefore a recognized rack pricing point.21 ¢ 7. margins and throughputs were typical of other markets with a similar population base.80 rank 9 rank 7 rank 10 rank* 10 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. this market is removed from other significant markets.

790 17 261 4. Since then.extax Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 58 . it is an established rack price point. and has remained very close to the Canadian 10-city average.Winnipeg population # of brands # of outlets outlets per 10.ex tax Canada Average .Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Winnipeg Rack Price Winnipeg Posted Pump Price RUL Winnipeg Posted Price . this market is removed from other significant markets. Price history / Taxation: In the early 1990’s this market experienced some price war activity. Geographic / Supply / Freight cost considerations: No refining capacity exists within the Winnipeg market.000 616. though somewhat higher than average ex-tax pump prices.22 ¢ 7.265. Figure 31: Winnipeg . This may reflect a lower than average Consolidated Net Income. probably related to a regional surplus of wholesale inventory (see Regina). although.06 ¢ 0. Consolidated net revenue: No ancillary or outlet cost data was available for this market.23 rank 6 rank 6 rank 5 rank* 8 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.84 ¢ rank 8 rank* 11 rank* 2 rank* 12 sample size 61 General: The Winnipeg market is characterized by stable. possibly due to modest ancillary revenue. this market has exhibited relatively stable pricing. prices have tended to stay somewhat above the Canadian average. Margin/Throughput relationship (Figure 24): Winnipeg fell within a cluster of markets exhibiting similar margins relative to their throughputs. and therefore experiences no particular influences from any other major market. Influence of other markets: Like Calgary. although there is no study data to support this.217 litres 8. On an ex-tax basis. like most markets of this population density.

000 1. situated on a major North-South highway to the United States Among the study group. Influence of other markets:. This strategy has had the effect of sustaining a roughly 10 million litre per year retail gasoline market .585 4 5 31. Nanton appeared to benchmark its pump prices to those of Calgary. MJ ERVIN & ASSOCIATES 59 .51 ¢ rank 15 rank* 3 rank* 10 rank* 3 sample size 2 General: Nanton is a farming community approximately 70 km south of Calgary. in terms of expected petroleum revenues. Geographic / Supply / Freight cost considerations: Located within an hour’s drive of the Calgary rack. the Nanton retail gasoline market displayed the same price attributes as a major urban market. Due to its highway location and its proximity to Calgary. Nanton was the smallest market in terms of population. placing Nanton well below the expected margin. Despite its small size. due to its proximity to one. in order to maintain a share of the considerable potential sales revenue that passes through this market.55 rank 19 rank 17 rank 18 rank* 19 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Some unique characteristics of this market serve to illustrate why some smaller markets experience relatively low pump prices. Its setting on a major highway provides a significant opportunity for attracting highway motorist volume. a feature not available to other. it is likely that low operating costs. While these conditions would normally result in a high gross product margin. Price history / Taxation: In order to attract market share beyond simply the local population. Consolidated net revenue: No Ancillary or cost data was available.Nanton. Nanton was perhaps the least viable market in the study group. Margin/Throughput relationship (Figure 24): Like some other small markets in the study group. this market has a relatively low freight overhead. While the margin data might suggest that retail gasoline operations in Nanton would not be profitable. In this respect.91 ¢ 0. Unlike many of the smaller markets in this study group. Alberta population # of brands # of outlets outlets per 10. Average outlet throughputs were relatively low.071. Nanton had a high number of per capita outlets . although not as low as expected. would have an offsetting effect. and perhaps healthy ancillary sales associated with highway traffic.600.far in excess of what would be expected of a community with a population of 1. Nanton has traditionally priced either at or below Calgary. more isolated small-town markets.and a low average outlet throughput. as Figure 24 shows. the retail gasoline market in Nanton was not restricted to the local population. Nanton had the second lowest gross product margin of the study group. while others experience consistently high prices.41 ¢ 5.the highest of the entire group .000 litres 5.

high pump prices. its normal rack point. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. Supply is via tanker truck from Edmonton. In contrast to Nanton. Peace River has among the highest freight cost in the study group.91 rank 17 rank 13 rank 14 rank* 17 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Geographic / Supply / Freight cost considerations: At 1. nor is it influenced by. Peace River also experiences high freight costs. and in fact fell into a tight cluster of four other study markets.623 litres 12.45 ¢ 1. and due to its isolated locale in northern Alberta. they were comparable to other markets with similar average throughputs. the community of Peace River is subjected to a number of factors which give rise to higher than average prices.715 6 8 11. and was accordingly chosen as a study market.85 ¢ rank 13 rank* 16 rank* 16 rank* 15 sample size 4 General: Peace River is located at a considerable distance from the nearest source of primary supply. other markets. this market has little or no influence upon. Influence of other markets: Since it is not located on a major inter-urban thoroughfare. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. Price history / Taxation: Peace River is typical of small. experiencing relatively high gross product margin and consequently.6 ¢ 10. Alberta population # of brands # of outlets outlets per 10. further adding to overall high pump prices. isolated markets. though fairly typical of many smaller.000 6.157. MJ ERVIN & ASSOCIATES 60 .6 cents per litre.Peace River. isolated markets.

the Thompson market experiences some competitive disadvantage due to its small population base and limited market potential. These factors resulted in relatively strong per-outlet net revenues.000 14. a significant portion of which would likely be distributed towards supplier overhead costs.02 cents per litre. Other considerations: Like other small markets. Although outlets in Thompson appear to be as competitive as those of any other study market. resulting in per-outlet petroleum revenues which were quite typical of many markets. A reduction in the number of outlets might seem to be the best way to improve outlet throughput performance. further adding to overall high pump prices. would have the conflicting effect of reducing the consumer’s choice in a market with a limited choice to begin with.975 5 6 4. Thompson is among the highest freight costs in the study group. remote market.08 ¢ rank 16 rank* 17 rank* 17 rank* 16 sample size 4 General: Like Peace River. this market has little or no influence upon.520 litres 14. high pump prices. MJ ERVIN & ASSOCIATES 61 .1 ¢ 3.01 rank 16 rank 15 rank 17 rank* 7 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2.02 ¢ 11. Influence of other markets: Since is not located on a major inter-uban thoroughfare. experiencing relatively high gross product margin and consequently.014. the community of Thompson clearly falls into the category of a small. Thompson is faced with the dilemma. It also experienced high freight costs. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. outlet costs were also modest typical of most smaller markets. other markets. This however. Geographic / Supply / Freight cost considerations: At 3. Consolidated net revenue: Low outlet throughputs were offset by higher margins. isolated markets. its usual rack point. thereby creating the potential for narrower margins. and due to its isolated locale in northern Manitoba. Although ancillary revenues were the smallest of the study group. and reduced pump prices.Thompson. Supply is via tanker truck from Winnipeg. Manitoba population # of brands # of outlets outlets per 10. nor is it influenced by. Price history / Taxation: Thompson was typical of small. and in fact fell into a tight cluster of four other study markets. they were comparable to other markets with similar average throughputs.

extax Toronto Posted Price . it is likely that outlet ancillary revenues are among the highest in the country. this market ranked first in a number of measures: lowest gross product margin.275.Toronto population # of brands # of outlets outlets per 10. Geographic / Supply / Freight cost considerations: Toronto has nearby refining capacity. Price history / Taxation: 1995 posted pump prices in Toronto did not differ markedly from those of other major Canadian centres.478 litres 3. thus there exists a climate of robust competition. In addition. exhibiting a lower margin than even expected of an extraordinarily high average outlet throughput. an outlet pumping significantly less than the average 5 million litres annually would not be likely to generate sufficient revenue to remain viable.ex tax Toronto Posted Pump Price Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 62 . With an average “blended” gross product margin of only 3. stretching from Pickering to Buffalo. and first in average throughput per outlet. Influence of other markets: This market is continuously linked with several other major retail markets. Within this region are thousands of retail outlets.4 rank 1 rank 2 rank 2 rank* 1 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 5. and is also relatively close to wholesale supply sources in the US. least number of outlets per capita. On an ex-tax basis however.098.000 2. it had the second highest brand variety of the study group.775 30 546 2.06 ¢ rank 1 rank* 1 rank* 7 rank* 1 sample size 59 General: Within the study group.36 ¢ 0. Margin/Throughput relationship (Figure 24): This market stood apart from the study group. New York. Consolidated net revenue: Although no study data was available for this market. It consequently has a low freight component. and a resultant low consolidated net revenue.06 cents per litre. as evidenced by an exceptionally low gross product margin. this market was consistently less than the 10-city average. similar to that of Montreal. This is likely offset by high operating costs. Figure 32: Toronto .3 ¢ 3.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Toronto Rack Price Canada Average .

29 ¢ 5. and operating costs were higher than most. This would suggest that it was as competitive as any other major market of similar size and throughput characteristics. Price history / Taxation: Pump prices in this market were comparable to other major centres when viewed on an ex-tax basis. margins and prices in Ottawa are typical of markets with similar throughput and net revenue characteristics.145 19 209 3.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Ottawa Rack Price Ottawa Posted Price .97 ¢ 0. in fact. some of which have on occasion priced below Ottawa (see Nanton and Calgary).948 litres 5. Consolidated net revenue: was low.68 ¢ rank 2 rank* 4 rank* 6 rank* 4 sample size 39 General: Ottawa was very typical of major markets. exhibiting all of the characteristics of robust competition. Although petroleum revenues were typical of major markets. slightly lower that expected. ancillary revenue was slightly lower than average.000 678.08 rank 5 rank 4 rank 6 rank* 4 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 4. Other considerations: While pump prices in this market were somewhat higher than in Toronto. Figure 33: Ottawa .Ottawa population # of brands # of outlets outlets per 10. freight costs within this market were quite low. Geographic / Supply / Freight cost considerations: As Ottawa is an established rack point.004. Margin/Throughput relationship (Figure 24): This market had the second highest average outlet throughput of the study group with a correspondingly low gross product margin. and close to the Canadian 10-city average. rural markets co-exist in this area.ex tax Canada Average .extax Canadian Average Posted Pump Price Ottawa Posted Pump Price RUL MJ ERVIN & ASSOCIATES 63 . Influence of other markets: Although Ottawa is the only major market in the immediate area. several smaller.

465.95 rank 11 rank 10 rank 12 rank* 3 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.73 ¢ 1. average throughputs were modest. MJ ERVIN & ASSOCIATES 64 .22 ¢ 7. Freight costs are therefore high. partly due to higher freight costs. This would suggest that a significant market share is being lost across the US border. Consolidated net revenue: This market showed the highest consolidated net revenue of the study group.550 litres 8. Pump prices in this market were thus typical of any market with similar throughput characteristics.51 ¢ rank 6 rank* 12 rank* 15 rank* 9 sample size 12 General: While situated at some distance from its nearest source of rack supply. this Canadian market has some difficulty in remaining both competitive and viable. yet with some potential for cross-border retail competition. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. and accordingly. somewhat isolated. Margin/Throughput relationship (Figure 24): While this market had the third-lowest per capita outlet population of the study group (behind Vancouver and Toronto).000 81. a product of relatively strong net petroleum revenues combined with lower than average operating costs.Sault Ste Marie population # of brands # of outlets outlets per 10. Geographic / Supply / Freight cost considerations: Sault Ste Marie uses Toronto as its usual rack point. Sault Ste Marie is a sizable market.475 10 24 2. Influence of other markets: This market is close to a US border market. a consequence of the transport distance from the rack point. and between 5 to 8 cent per litre in gross product margin. Sault Ste Marie fell into a cluster of 10 study markets of between 3 to 4 million litres in average annual throughput.

006 litres in 1995. and outlet throughputs of any market studied.76 ¢ rank 19 rank* 18 rank* 18 rank* 18 sample size 2 General: Sioux Lookout was one of the smallest markets within the study group.066 litres 14. one-seventh the average throughput in Toronto. Influence of other markets: This is clearly an isolated market. Margin/Throughput relationship (Figure 24): Sioux Lookout’s gross product margin.Sioux Lookout population # of brands # of outlets outlets per 10. Consolidated net revenue: No data was available for this market.000 3. despite its high prices. Geographic / Supply / Freight cost considerations: Sioux Lookout is normally supplied from the Winnipeg rack via tank truck. although high.96 ¢ 3. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. this market experiences a high degree of price competition. brands. in fact the second highest in the study group. An average outlet in Sioux Lookout pumped only 694.06 rank 18 rank 19 rank 19 rank* 16 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 694. with little or no influence from other retail gasoline markets.2 ¢ 11. Freight costs are therefore high. and had the least number of outlets. so that virtually all sales volume represents local demand only. largely due to higher freight costs.310 3 3 9. Sioux Lookout is well-removed from any major highway. This is a major factor in the high cost of gasoline in this market. MJ ERVIN & ASSOCIATES 65 . It therefore presents some unique characteristics for the market study. was much less than expected for a market of this size. This would suggest that.

Influence of other markets: Like Toronto. pump prices in this market have a tendency to be volatile. This. and is also relatively close to wholesale supply sources in the US.extax Montreal Posted Price . Montreal was included in the selected market study. combined with low petroleum revenues and high operating costs. Geographic / Supply / Freight cost considerations: Montreal has local refining capacity. placed Montreal lowest of all study markets in terms of consolidated net revenue.13 ¢ rank 7 rank* 2 rank* 7 rank* 2 sample size 74 General: As the largest retail gasoline market in the Quebec/Atlantic region. with resultant low average outlet throughputs.88 rank 2 rank 1 rank 1 rank* 11 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.3 ¢ 5. pump prices in Montreal have generally been at or below the 10-city average for major markets. thus promoting a competitive climate. Price history / Taxation: As the figure shows. Figure 34: Montreal .000 1. this market ranks first of the study group in terms of brand variety. this market interacts with several other markets in the region. an additional tax of 1.ex tax Montreal Posted Pump Price MJ ERVIN & ASSOCIATES 66 . On an ex-tax basis however. a function of a competitive rack market and an excess of retail outlets competing for market share.144 litres 5.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Montreal Rack Price Crude Oil Price Canadian Average Posted Pump Price Canada Average . Montreal nevertheless exhibited a gross product margin which was well below that expected for these throughput attributes.43 ¢ 0.Montreal population # of brands # of outlets outlets per 10. This market had the highest tax content of the study group due to high provincial tax rates (in 1996. Consolidated net revenue: Montreal outlets had relatively poor ancillary revenues compared to the major market average. It therefore represents a highly competitive rack market.5 cents per litre was introduced into the Montreal area). With 32 competing brands.775.870 32 866 4. Margin/Throughput relationship (Figure 24): This market would appear to be overrepresented in outlets compared to other major markets.394.

289 litres 12. but as the figure shows. MJ ERVIN & ASSOCIATES 67 . Chicoutimi is normally supplied from the Quebec city rack.Chicoutimi population # of brands # of outlets outlets per 10. for example). Margin/Throughput relationship (Figure 24): Outlet throughputs. a partial factor in the high cost of gasoline in this market. Influence of other markets: The Chicoutimi / Jonquiere market represents a sizeable population base. although low.75 cents per litre. Price history / Taxation: Chicoutimi benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border. by tank truck.28 ¢ 1. In the case of Chicoutimi. Freight costs are therefore somewhat high.250. were quite typical of markets with similar populations. yet is geographically quite isolated. Geographic / Supply / Freight cost considerations: Although some markets of this size support a viable rack market (Saint John.2 ¢ rank 12 rank* 15 rank* 13 rank* 17 sample size 16 General: The Chicoutimi area was somewhat unique among the study markets in that there is a relatively large population base. Nevertheless.605 14 97 8.08 ¢ 11. Gross product margin was accordingly high. within a cluster of other markets with similar attributes. but is quite isolated from any other markets. this market has little potential as a rack market. both pump and ex-tax prices in this market were higher than average.04 rank 10 rank 8 rank 9 rank* 15 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2.000 120. Consolidated net revenue: was average among the study group. this amounted to a reduction of 5.

Price history / Taxation: Gaspé benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border.Gaspé population # of brands # of outlets outlets per 10. Freight costs are therefore high. Influence of other markets: This is clearly an isolated market.75 cents per litre. Nevertheless.50 ¢ 3. a product of high freight costs and gross product margins. amounting to a reduction of 5. Margin/Throughput relationship (Figure 24): This market had the second-lowest outlet throughput of the study group. in the case.17 ¢ rank 18 rank* 19 rank* 19 rank* 19 sample size 2 General: Gaspé is a relatively small market. MJ ERVIN & ASSOCIATES 68 .400 6 13 4.900 litres 17.88 rank 13 rank 13 rank 8 rank* 12 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 981. both pump and extax prices in this market were higher than average. Geographic / Supply / Freight cost considerations: Gaspé is normally supplied from the Montreal rack. ancillary revenues would likely be modest. with little or no influence from other retail gasoline markets.17 gross product margin the highest of the study group. this margin was only slightly higher than expected for a market with these throughput attributes. in fact the highest in the study group.33 ¢ 14. located at a considerable distance from its rack source of supply. Although operating costs are likely to be low in a small market like Gaspé. Gaspé is well-removed from any major highway. Nevertheless. so that virtually all sales volume represents local demand only. by tank truck. a key factor contributing to its 14. Consolidated net revenue: No data was available for this market.000 16. This is a major factor in the high cost of gasoline in this market.

posted pump prices in the Saint John market have closely followed the 10-city average.694 litres 9. this market fell within the expected range of gross product margins as a function of outlet throughput. which for Saint John. and is capable of shipping and receiving wholesale product through marine facilities. Geographic / Supply / Freight cost considerations: Saint John is home to a large regional refiner. resulting in lower than expected average outlet throughputs. Accordingly. Margin/Throughput relationship (Figure 24): Saint John is somewhat over-represented by retail outlets.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Saint John Rack Price Canadian Average Posted Pump Price Saint John NB Posted Pump Price RUL Saint John Posted Price . reflected in the high ex-tax pump price.27 ¢ 9.000 74. do not differ markedly from any other rack point in the study group. it is an established rack point. Nevertheless.79 ¢ 0. Consolidated net revenue: was average for the study group.extax MJ ERVIN & ASSOCIATES 69 . retail pump prices are ultimately a reflection of rack prices. and therefore. freight costs in this market are low. That a major refinery resides in this market might suggest that these prices should be among the least in the country. Average gross product margin was consequently high.Saint John NB population # of brands # of outlets outlets per 10. In fact. Since provincial taxes are among the lowest in the country. the Saint John retail market is relatively isolated from other retail markets of any significance.52 ¢ rank 14 rank* 13 rank* 4 rank* 13 sample size 17 General: As a major refining centre in Atlantic Canada. with or without a local refinery. Influence of other markets: Although rack pricing is potentially subject to influence from other Atlantic coast terminals. Price history / Taxation: Historically. The only real benefit that a local refinery provides is the modest rack-to-outlet freight cost factor.ex tax Canada Average .970 9 56 7. Saint John presents some unique characteristics for the market study. Figure 35: Saint John NB .095.47 rank 12 rank 11 rank 11 rank* 14 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. ex-tax prices were relatively high.

Halifax
population # of brands # of outlets outlets per 10,000 330,845 9 113 3.42 rank 7 rank 11 rank 7 rank* 5 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,058,010 litres 6.0 ¢ 0.27 ¢ 5.73 ¢ rank 11 rank* 5 rank* 4 rank* 5

sample size 18

General: As the largest population centre in Atlantic Canada, Metro Halifax was included in the selected market study. Geographic / Supply / Freight cost considerations: This market is served by a number of regional refineries, including one situated locally. Its marine port status allows for the potential import of refined product from any one of several refiners on the US east coast or western Europe. Influence of other markets: The Halifax/Dartmouth market represents a sizable population base, with a commensurate representation of retail outlets. It is relatively isolated from other retail markets of any significance. Price history / Taxation: For a number of years until mid-1991, retail pump prices, numbers and types of outlets and pump service (full vs self-serve) were regulated by that province’s Public Utilities Board (PUB). This structure was likely responsible for the historically high pump prices that existed in this market until late 1992. Since then, pump prices have generally fallen to reflect market conditions, and have on occasion, experienced price war activity, most notably in 1996, where at times, prices fell below the posted rack (wholesale) cost. Margin/Throughput relationship (Figure 24): Halifax exhibited a gross product margin well below that expected for these throughput attributes. While product margin ranked 5th lowest in the study group, outlet throughput was disproportionately low, ranking 11th. Consolidated net revenue: No data was available for this market.

Figure 36: Halifax - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Halifax Posted Pump Price RUL

Halifax Posted Pump Price - ex tax Canada Average - extax

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Charlottetown
population # of brands # of outlets outlets per 10,000 15,395 5 23 14.94 rank 15 rank 15 rank 13 rank* 18 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 1,890,648 litres 11.17 ¢ 1.14 ¢ 10.03 ¢ rank 17 rank* 14 rank* 14 rank* 14

sample size 4

General: As PEI is the only province that regulates gasoline prices, Charlottetown was included in the study group to derive some insights into its possible effect on competitiveness. Geographic / Supply / Freight cost considerations: This market receives marine supply, usually from Halifax, but often from one of several marine terminals in the region, including Saint John, Quebec city or Montreal. Influence of other markets: Due to its island setting, retail consumers have little opportunity to shop adjacent markets for the lowest-priced gasoline. Price history / Taxation: Charlottetown has perhaps the consistently highest ex-tax pump price of any urban market in Canada. Margin/Throughput relationship (Figure 24): Charlottetown is probably over-represented by retail outlets, resulting in lower than expected average outlet throughputs. Average gross product margin was consequently high, reflected in a high ex-tax pump price, although it was comparable to other markets with similar throughputs. Consolidated net revenue: No data was available for this market. It is unlikely that the removal of price regulation would result in pump prices any higher than already exist in this market. Competitive disadvantages which exist in PEI markets are shared with many other non-regulated markets which exhibit a pattern of lower prices. Therefore, there is likely no consumer benefit, and there may be some detriment attached to the PEI regulatory structure, as evidenced by its pricing history and that of Halifax. Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness, and likely a negative impact on consumers.

Figure 37: Charlottetown - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Charlottetown Posted Pump Price RUL

Charlottetown Posted Price - ex tax Canada Average - extax

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Part E

Findings, Conclusions & Recommendations
This Retail Petroleum Markets study meets the study objectives of: • • • • providing a sound database for policy direction; providing a means to better understand competitive opportunities and challenges; assessing the viability and competitiveness of regional markets; and determining key competitiveness factors in specific markets.

The study thus provides a tool to understand the dynamics of this vital and complex industry, and a foundation for effective policy development.

Findings
This study presented twenty-two findings which are derived from the pump price model analysis, historical evaluation of pump prices and margins, and specific market analysis: Finding 1: Refiner and Marketing Margins are a consequence of their defining prices, in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale............................................................................................. 7 Finding 2: 1996 average crude price, as a factor of the regular gasoline retail pump price, was 19.1 cents per litre, or roughly 34 percent of the pump price................... 9 Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive, market-driven Rack (wholesale) pricing of petroleum products................................................................................................... 11 Finding 4: In 1996, petroleum taxes accounted for 50.3 percent of the average urban price of regular gasoline in Canada................................................................ 17 Finding 5: In 1996, the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline, was 5.3 cents per litre............................................................... 17 Finding 6: In 1996, the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market, was 3.5 cents per litre. ......................... 17 Finding 7: Price uniformity and price volatility, facilitated through street price signs, are indicators of a competitive market........................................................... 21 Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature, but exist to meet other important societal needs.... 23 Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada. ..................................................................................................... 28 Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years.......................................................................... 31

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......................................... The viability of the Canadian retail gasoline sector as a whole may be somewhat better............................................ 48 Finding 19: Based on published rack prices...................... 43 Finding 17: Market-specific differences in product freight are a key factor in intermarket ex-tax pump price differences.. remote population centres..................... residuals for outlets not studied may be better.. which in turn......... In effect....................... petroleum sales revenues alone were insufficient to cover operating costs for the 481 outlets studied....................... 71 MJ ERVIN & ASSOCIATES 73 .... The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations........ the residual represented a net loss to the supplier..... and likely a negative impact on consumers.... Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads.... the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre........................ 45 Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes.................Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products... are principally a reflection of changes in the underlying price of crude oil...................................... ........ 52 Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness. 50 Finding 20: For the 481 individual outlets studied....... .................................. particularly in comparisons of major urban markets to small................. 37 Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences....... 33 Finding 13: From 1991 to 1996.................................51 Finding 21: Based on published rack prices and the individual outlet data............... 32 Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs............ ...... after the average 1995 consolidated revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements....... the profitability of the 481 outlets studied appears only marginal.................... 35 Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels.... given the possibility of discounts from posted rack prices and potentially lower overhead costs.................. ....................... 33 Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US..... which ensures a competitive product price for buyer and seller alike. ................................ when compared on an ex-tax basis............................. while those with high Gross Product Margins tend to have low outlet throughputs......................... reduced pump prices....... ..... these ancillary operations contributed to a lower product margin and consequently...... a feature of most market-regulated commerce............ while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre.....................................

when taxes were excluded (Finding 14). Canadian prices have been at or below US prices in recent years. the very margins within which this industry operates has. was observed (Finding 10). In comparing several diverse markets. 2. when measured in constant and nominal dollars. was shown to be strongly competitive: • A long-term decline in pump prices. exhibited a diminishing trend (Finding 13). Virtually all of the competitiveness indicators examined in this study relate to price. The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement. price is but one of four competitiveness “tools” available to marketers (product. and promotions are the other three). This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). is mistaken. over the long term. in comparing Canada average (city) pump prices to those of the United States. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. The study presents such a model. by all objective measures available to this study. Rack and pump prices are determined in competitive marketplaces. which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. The Canadian retail petroleum products industry. 1. • • These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector. This has not simply been a result of a decline in underlying raw materials costs.Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. The resultant margins. a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18). As described in this study however. place. On a national level. each with unique dynamics. Although an objective measure of competitiveness is elusive. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one. Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. which at times can decline to very low or MJ ERVIN & ASSOCIATES 74 .

but even in such cases. while crude oil markets are considered global in scope and rack product markets are considered regional in scope. Due to the localized nature of competition in the retail gasoline marketing sector. This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). are thus a reflection of the state of product supply. or even between Canadian markets with differing tax structures. an exercise that consumers are unlikely to engage in. and are a predominant cause of inter-regional pump price differences (Finding 16).even negative values. While some markets. experienced higher than average pump prices. Taxation is a significant factor in the price of retail gasoline. rack price and freight cost. provincial. it is important to understand that. generally do not serve as competitiveness inhibitors. The latter two can vary considerably from one market to another. municipal levels of government. MJ ERVIN & ASSOCIATES 75 . crude costs accounted for roughly 34 percent (Finding 2). the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. Dealers were shown to have a variety of relationships with their supplier. This implies that the competitive dynamics pertaining to these retail markets can. and in some markets. and do. The demonstrated exception to this is in markets directly adjacent to nearby US markets. In applying such a model to the retail petroleum marketing industry. the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9). This would entail the tracking of not only pump price. taxation as an element of public policy is an area worthy of additional research. and product margins accounted for 3.3 cents or 9 percent (Finding 5). these markets have managed to sustain a certain level of viability and competitiveness. when the “outside” factors (tax. particularly smaller ones. By contrast. and accordingly.5 cents. but given its magnitude. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin. since this is the effective range of consumer choice. taxation differences between Canadian and US markets. demand and other competitive factors existing at the time. but also rack prices and outlet performance. presents a competitive disadvantage to Canadian marketers. but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues. retail petroleum markets are considered local (municipal) in scope. refiner margins accounted for 5. and in some markets. or 6 percent (Finding 6) of the 1996 average regular pump price. vary considerably from one population centre to another. 3. for example) were rationalized. well over half of all outlets in Canada operate as lessees or independents. Petroleum product taxes are levied at the federal. The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study. measured against the average outlet throughput for that market.

Retail pump prices showed a corresponding seasonal pattern. supplier costs and profitability. further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). In fact. incorporated with ancillary revenues and outlet costs.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). Retail pump price changes showed a close relationship to underlying rack prices. when examined on the margin-volume model. a price-stable market. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto. The pump price/margin model shows that in 1996. translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets. the Canadian retail marketing sector realized an average gross margin of 3. fluctuating prices are a strong competitiveness indicator (Finding 7). Demand for gasoline was shown to vary significantly according to the time of year. is available to provide for all retail marketing operations including outlet costs. Pump price fluctuations can be an indicator of competition in the marketplace. While price wars are undoubtedly an indicator of competitiveness. the absence of price war activity does not imply a lack of competitiveness. and more price-stable markets such as Sioux Lookout. Sioux Lookout. MJ ERVIN & ASSOCIATES 76 . and a loss in the case of urban markets. second only to the United States. which in turn is the principal driver of ex-tax pump prices. Viewed from this perspective. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis. showed a close relationship to underlying crude prices (Finding 11). dealer income. which in turn.Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world. reflecting consumer demand behavior (Finding 15). 4. on the basis of price fluctuation alone. when distributed these three ways (Finding 20). exhibited competitive traits typical of any of the study markets. it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution. This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace. Retail gasoline marketing revenues. in a highly distinct. This margin represents gross revenue (after wholesale product and freight cost) which. Rack prices were shown to not significantly differ between major centres. This consolidated outlet revenue. 5. on a per litre basis. predictable seasonal pattern. constitute a small portion of the retail pump price. which represent the majority of Canada’s population base.

While these economics might appear to place this industry in a position of poor viability. crude costs. serve as perhaps the most significant indicators of competitiveness in the downstream industry. and have resulted from. It is likely that regional and nonrefiner marketers operate with somewhat smaller overhead costs than those used in this study. Both the downward trend in margins. intense competitive pressures in the downstream industry in general. 7. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). several competitive strategies. assuming all other costs were unchanged. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. in the long term these fluctuations are likely more reflective of market restorations. Nevertheless. and in turn. Thus. despite increases in tax content and crude costs (Finding 12). have caused. Since 1991. Thus. and the marketing sector in particular. Industry profitability is extremely sensitive to very small changes in pump price. the rack price basis used in this study probably understates actual revenues by about 1 to 2 cents per litre. including: • • • improving production efficiency through refinery plant rationalizations (closures). despite the predisposition of many observers to use them as such. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). most outlets used in the 19-market study represent major integrated oil companies. Declining refiner and marketing margins. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. Also. Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992. both of which are beyond the direct influence of Canada’s oil companies. and the associated industry initiatives which are ongoing in nature. if Canadian average pump prices were only one cent higher than they were in 1995.6. this industry sector would have realized profits of unprecedented proportions. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin. not excessive profits. but to increases in underlying rack prices. and has been a result of. based upon an assumed posted rack price. Indeed. Also. MJ ERVIN & ASSOCIATES 77 . emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. This trend has both resulted in. these findings clearly show that pump price increases are ultimately linked not to increased profits. not price.

a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). which should. had petroleum margins which were commensurate with average outlet throughput for that market. most markets. thereby improving petroleum volumes and ancillary revenues at the remaining sites.8. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. more isolated markets are generally higher than in larger centres. reducing the number of outlets may also reduce the number of competitors. Thus. This created some economic pressure to sell product at a higher pump price. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. virtually all of the 19 study markets exhibited similar levels of competition. While competitiveness in most smaller markets was shown to be as active as in larger centres. although this study provides comprehensive evidence of this. poor outlet throughputs were generally the predominant factor.5 million fewer litres of gasoline than a group A (major centre) station. the solution would be to encourage some dealers to exit the market. The costs of most consumer goods in smaller. Smaller. and this study showed that gasoline prices were no exception. regardless of size. it would seem that if local government in smaller markets were interested in lowering pump prices. average pump prices were relatively high. A wide range of petroleum gross product margins were evident within the 19market study group. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. there are three points to consider: • In very small markets. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. In suggesting this approach however. MJ ERVIN & ASSOCIATES 78 . When these margins were compared to their corresponding outlet throughputs. which could actually inhibit competition. Outlet throughput is a key determinant of inter-market pump price differences. isolated markets face particular challenges: although found to be highly competitive. Although some smaller markets appeared to have higher gross product margins than larger markets. 9. That such a relationship should exist was not surprising. When plotted against the margin-volume model. • • At first glance. reduce pump prices. according to the margin-volume model. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). other factors exist which contribute to relatively high margins and prices.

As these findings show. 11. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. Charlottetown. characterized by narrow product margins and relatively flat pump prices. car wash. and likely others in Nova Scotia. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. in order to build upon the findings in this study towards a full understanding of the dynamics at work. will likely preserve a highly competitive petroleum market. The historical record is clear however: since deregulating pump prices. does not appear to benefit in consumer terms. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). is both the cause and consequence of increased activity in ancillary operations. depressed petroleum revenues below that of outlet operating costs. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). The loss of employment represented by a station closure may be of some concern to smaller communities. as marketers find even more innovative ways to attract market share. and the traditional automotive service bay. has seen a decline in pump prices relative to other Canadian markets. and the perceived effect on their markets. many national and local environmental regulations exist for good cause. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence.• A full-serve retail gasoline outlet typically employs 3-5 staff. Convenience store. are an acceptable limitation on pure competition (Finding 8). is well beyond the scope of this study. the degree of price competition in the retail petroleum has in effect. This competition then. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. and as such. the Halifax market. The federal Competition Bureau for example. Also. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. MJ ERVIN & ASSOCIATES 79 . Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. under the current PEI regulatory structure. 10. is viewed as an agency which exists to the benefit of industry and consumer alike. and in turn. Retail ancillary operations are a critical element of petroleum price competition.

1. This should be in the form of a quarterly summary of price trends and related measurements. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: MJ ERVIN & ASSOCIATES 80 . 2. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. and the nature of competitiveness influences. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. Develop cooperative industry research into marketing sector competitiveness issues. in a simple format designed for consumers and legislators. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. Public perception measurement. A regular comprehensive competitiveness evaluation. not inhibit. that where a healthy competitive climate exists. possibly to the detriment of the consumer. as it does in the Canadian petroleum marketing sector. and the converse image held in much of the public domain. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. margins and competitiveness factors. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. direct regulatory interventions may have an adverse effect on competitiveness. Improve public understanding and awareness of competition in the petroleum marketing sector. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. petroleum marketing competitiveness.This study proposes rather.

Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. using Canadian and foreign selected markets. and issues/opportunities facing such markets. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. the possible effect of underground storage tank legislation as a potential barrier to market exit and competitiveness inhibitor. along the lines of the model used in this study. using Canadian and foreign selected markets. is vital if Canadians are to put in place the structures that truly meet their social and economic needs.• Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. by industry. • • • • * * * Better understanding of this industry. using Canadian and foreign selected markets. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. consumers. and in particular. MJ ERVIN & ASSOCIATES 81 . Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. and regulators alike.

Appendices MJ ERVIN & ASSOCIATES 82 .

Marketer . Independent Petroleum Marketer . and in some regions. car wash.(for the purpose of this study) the cost. independent dealers.I Glossary of Terms Ancillary service . and included in the retail pump price. There are several modes (see below) of dealer operation. the regular unleaded pump price. Excise Tax . safety and business issues. GST.an organization who sells refined petroleum products to end-use consumers. of transporting petroleum product from the rack point to the final point of sale.a federal tax on retail gasoline purchased by domestic (ie: motor vehicle) consumers.the segment of the oil industry involved in the refining and/or marketing of petroleum products such as gasoline. Downstream . Lessee . in cents per litre. Dealer . health.a particular mode of retail petroleum operation where the outlet operator (dealer) leases the retail outlet from the product supplier. The ex-tax pump price is exclusive of these taxes. municipal tax levees. Grade Differential . an association of petroleum refiners and marketers. Major Oil Company . provincial pump tax. but inclusive of any corporate taxes on earnings. and therefore purchases its supply of petroleum product from an outside source.a generic term referring to a retail outlet operator.the retail price of gasoline that would be displayed if all product taxes were removed..a service provided in addition to the basic retail petroleum sales operation.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in most or all of Canada’s provinces. diesel. for example. and commission dealers. Integrated Oil Company . generally expressed in cents per litre.a petroleum marketer who is not involved in the refining of petroleum products.the difference in pump price between a premium or mid-grade of gasoline vs. Distribution Costs . such as convenience goods. These product taxes include Excise tax. CPPI . Margin . service bays.. such as lessees. MJ ERVIN & ASSOCIATES 83 . lubricants. and purchases petroleum products from the same supplier for resale at a pump price determined by the lessee. which serves as the voice of the petroleum products industry in Canada on environment.the difference which exists between net sales and the cost of merchandise sold and from which expenses are usually met or profit derived.Canadian Petroleum Products Institute. such as a retail gasoline outlet. Ex-tax Pump Price .a petroleum marketer which is involved in both the upstream and downstream aspects of the oil industry. etc. such as a major oil company or regional refiner/marketer. currently established at 10¢ per litre. etc. Usually expressed on a per-unit basis.

the volume (ie: in litres) of petroleum sold at a retail outlet in a given period. PCF .the point at which title to refined product is transferred from the refiner to the supplier.the segment of the oil industry involved in the exploration and/or production of crude oil. Refiner .Mode .the internal price paid by an integrated refiner/marketer to its own refinery for refined petroleum products. lessee. and independent dealer. In the retail gasoline sector. commission dealer. This may be at a refinery loading terminal. MJ ERVIN & ASSOCIATES 84 .an organization who. it is usually based on the market-driven rack price. the raw material from which petroleum products are manufactured. with a non-advocacy mandate to improve public awareness of Canada’s petroleum sector.within the context of retail gasoline marketing.the type of contractual relationship between the supplier and the dealer (outlet operator). is typically also the brand name owner of the chain of gasoline stations to which it supplies refined petroleum products. Upstream . the supplier has initial title to the petroleum product as it leaves the rack point. Regional Refiner/Marketer .Petroleum Communication Foundation. Supplier . manufactures (from crude oil) a range of petroleum products suitable for consumer use.the wholesale price posted at the rack point.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in a limited number of provinces. an association of upstream and downstream oil companies and related organizations. Although in theory the transfer price could be set at any arbitrary value. or at one on several loading terminals (usually in major population centres) where petroleum is marketed to non-refiner supplier/marketers at posted rack prices. Rack Point . Rack Price . these can be broadly classified as company operated. usually per month or per year. Transfer Price . Throughput .

6 122.4 97.3 58.3 119.0 97.7 118.8 95.5 112.3 132.3 115. MJ ERVIN & ASSOCIATES 85 .9 122.4 45.0 32.1 105.1 103.4 122.6 136.4 27.3 55.0 93.3 52.4 110.0 1988 108.5 25.2 99.6 92.2 45.3 125.4 57.2 39.1 146.1 115.1 117.1 48.2 49.6 91.7 124.3 40.0 104.8 106.9 115.7 Note 1 Note 2 Note 3 Price Index data is from Statistics Canada Cat.9 118.2 31.4 120.2 133.1 144.9 1995 133. 1986 Constant (¢/litre) (3) 1986 100 100 100 100 100 100 100 100 100 100 100 47.5 126.2 20.1 104.2 109.4 136.1 120. 62-010: Consumer Prices and Price Indexes.8 130.1 120.2 112.9 97.7 122.6 133.7 22.9 108.4 53.5 120.1 117.0 1991 126.4 34.4 104.8 132.5 100.4 104.8 108.3 141.8 94.2 127.5 124.2 142.1 126.0 102.2 50.1 104.3 151.1 26.7 95. No.3 122.8 135.4 124.6 107.6 51.7 30.8 93.5 30.1 151.II Source Data Tables Table A: CPI Index: Selected Goods and Services Year **All Items** (1) Food Shelter Natural Gas Fuel Oil Telephone Gasoline Auto Repair Alcoholic Beverages Domestic Water Domestic Electricity RUL Annual Price.0 111.3 160.3 19.2 45.1 167.4 152.2 121.4 134.5 111.0 42.4 29.2 30.5 115.7 123.0 93. 1986 Constant (¢/litre) (3) RUL Ex-tax Price.8 104. Constant dollar RUL gasoline values were derived by applying the “All Item” CPI to the nominal price for that year. Nominal (¢/litre) (2) RUL Ex-tax Price.1 1990 119.3 96.9 1993 130.1 40.5 145.1 97.2 92.3 139.5 49.3 27.7 132.3 134.7 29.1 87.8 47.0 19.5 94. Nominal RUL (Regular Unleaded) price and ex-tax price is from Natural Resources Canada. using a weighted (by provincial gasoline demand) 10 city average.8 28. Nominal (¢/litre) (2) RUL Annual Price.9 26.0 115.7 54.9 1994 130.3 1989 114.7 96.9 155.0 30.0 135.9 26.3 1992 128.8 1987 104.

9 25.2 11.2 6.7 24.6 18.0 20.7 33.6 25.8 30.3 22.1 29.9 4.7 4.8 16.8 21.1 16.3 56.9 8.8 14.9 23.9 26.5 10.5 33.1 18.5 8.9 13.7 7.5 14.1 13.9 11.6 23.8 28.1 16.3 6.2 7.5 54.9 58.7 18.0 15.3 15.2 25.9 23.8 26.4 26.9 6.4 57.6 7.3 58.4 7.6 13.5 7.7 29.7 14.0 24.0 52.0 24.0 25.9 7.4 15.2 16.2 7.1 16.1 23.2 26.3 9.6 8.0 33.1 39.5 35.6 54.6 4.1 5.4 24.5 14.7 39.2 14.2 6.6 54.7 19.9 22.2 5.5 23.9 26.2 63.2 7.0 54.7 7.0 16.8 14.5 57.9 21.2 4.4 29.6 24.8 23.2 41.0 14.3 17.6 23.2 22.8 8.0 7.7 14.2 21.9 25.9 7.4 33.4 9.7 63.2 13.2 23.3 23.3 57.7 6.4 31.5 Gross Marketing Margin Gross Refiner Margin 53.9 31.8 11.9 30.7 34.0 26.0 24.9 53.4 24.4 53.9 14.8 24.3 15.2 65.4 34.9 4.5 10.7 15.4 31.0 4.7 19.3 42.7 29.6 25.3 13.1 18.8 23.1 24.9 12.5 30.2 13.1 23.4 20.0 5.3 26.2 13.1 19.1 9.0 25.8 13.5 26.8 55.4 32.7 Downstream Margin 14.7 31.7 13.9 9.9 56.5 16.0 7.0 55.4 13.4 14.0 16.9 7.8 53.1 21.5 26.2 56.9 25.8 57.7 32.4 22.4 58.7 28.6 13.4 14.5 25.7 12.7 7.3 25.0 7.2 14.0 26.9 55.7 29.0 12.5 22.4 30.2 25.5 15.7 8.3 13.2 26.1 17.3 54.6 6.2 15.1 52.4 14.1 53.0 13.5 56.8 14.6 26.3 66.9 53.4 8.6 28.9 24.9 23.5 32.3 56.9 25.3 24.4 MJ ERVIN & ASSOCIATES 86 .2 29.1 7.5 27.2 13.5 27.1 13.0 26.7 14.3 14.8 14.7 25.5 19.1 7.8 33.9 56.2 27.2 24.2 16.3 54.6 21.1 16.2 27.0 22.3 13.1 13.9 17.7 58.0 9.9 15.0 24.8 21.8 8.0 16.5 6.5 5.3 4.6 54.1 23.7 4.6 9.4 56.2 12.6 26.2 27.9 6.3 26.9 14.8 26.Table B: Key Price / Margin History .4 13.3 6.8 15.3 13.5 7.9 55.4 14.4 12.3 13.6 26.3 22.0 10.0 16.7 18.1 22.1 53.8 55.6 20.5 23.6 5.5 23.9 25.4 21.8 22.2 8.2 23.9 54.3 12.4 55.7 23.Regular Gasoline RUL Canada Avg Jan-90 Feb-90 Mar-90 Apr-90 May-90 Jun-90 Jul-90 Aug-90 Sep-90 Oct-90 Nov-90 Dec-90 Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 30.0 24.2 7.7 14.8 53.5 28.3 5.4 26.5 31.7 14.5 11.0 24.7 4.0 8.8 9.8 29.3 Tax Content 23.8 25.3 54.9 6.4 26.0 24.1 22.1 25.0 28.6 52.

2 14.7 8.6 53.7 23.4 25.7 24.5 54.8 20.1 11.4 28.9 4.9 12.5 9.1 16.6 15.2 12.9 27.3 13.4 25.5 15.5 13.3 23.3 4.9 23.4 32.5 14.4 6.9 3.3 9.4 13.0 52.2 20.2 26.5 7.6 4.5 21.8 49.3 26.9 17.2 27.9 19.3 9.3 26.1 54.0 9.1 11.8 28.2 11.7 25.3 58.9 14.3 27.5 17.1 61.5 5.4 21.5 6.0 14.9 9.0 14.3 8.5 19.0 28.4 5.8 4.1 15.8 27.1 26.8 23.7 16.1 14.7 52.1 3.3 7.1 11.5 6.2 7.4 26.8 28.6 20.7 6.2 26.1 6.8 22.5 21.7 3.1 21.7 5.2 Gross Marketing Margin 4.0 25.2 4.9 49.0 57.3 9.7 25.6 17.8 52.1 15.3 7.4 24.9 6.7 6.7 14.7 7.9 27.4 7.7 13.2 14.7 26.4 16.5 6.5 55.0 53.2 4.1 26.8 10.4 11.4 6.6 3.5 3.3 26.6 10.0 9.6 19.1 11.1 20.2 25.9 26.7 53.0 28.5 21.9 Downstream Margin 12.5 11.8 6.3 4.2 54.2 20.1 10.9 14.3 26.1 24.8 23.0 54.0 5.8 29.7 14.3 12.6 53.5 5.0 28.3 28.2 23.7 51.3 25.7 29.3 21.0 5.5 19.3 28.0 6.9 58.4 26.2 25.5 4.8 50.2 14.7 7.7 24.0 6.5 3.4 6.5 20.2 7.5 53.2 28.7 12.3 55.1 14.3 26.5 28.5 7.9 28.0 28.3 6.8 17.1 57.2 15.3 21.3 26.2 7.6 4.3 4.0 27.2 49.1 6.6 11.5 25.7 15.0 6.6 5.1 15.6 21.8 25.3 26.5 13.4 51.6 16.5 11.4 6.9 49.6 23.0 25.6 20.6 15.1 14.1 6.1 51.9 29.9 29.6 10.7 53.0 28.1 55.6 12.RUL Canada Avg Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Jan-96 Feb-96 Mar-96 Apr-96 May-96 Jun-96 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 26.1 source: Natural Resources Canada MJ ERVIN & ASSOCIATES 87 .9 4.6 27.0 12.7 5.1 51.4 15.0 11.2 7.5 23.9 5.4 4.2 9.6 9.0 26.3 54.3 53.7 3.0 26.7 26.7 53.7 13.1 Tax Content 26.9 11.9 12.0 12.0 24.0 29.5 2.4 26.3 26.1 6.2 5.4 26.1 26.3 26.4 21.7 18.2 26.1 Gross Refiner Margin 7.

220.002.114 3.684 2.633 2.412 2.739.439.799.1 29.188 3.779 2.8 23.890.844.644 3.682.5 27.378.370 2.475 2.346.782 3.4 29.354.322 2.604 2.287.967 2.389.521 2.636.508.246 2.5 28.767.804 3.8 30.599 2.837.785.796.176 3.532. and Pump/Rack Prices Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 2.804 2.934.047 3.403 2.6 23.7 24.067.627 2.322 3.5 30.161.775.932 2.630.047 2.752 2.044 2.995.767.864 2.5 22.000 3.202.037 2.151.473.688.295.299 2.9 17.415 2.2 27.045 2.325 2.409.966.2 24.1 23.131.637 3.281.873.025.245.572 2.628 3.322 2.2 27.830.369 2.865.6 28.874 3.3 23.7 29.5 23.141.191 2.8 28.878 2.2 21.9 23.641.682 3.831.615 2.485 2.808.2 29.671.122.8 29.4 24.876.516.883.122 2.853.620 3.893.477.732.045.443 2.101 2.164.2 20.324 2.279 2.0 20.716.4 22.8 23.930 3.4 32.095 2.333.429 2.887.361.085.133 3.729.113.027 2.693 3.294.897.373.6 24.622.633.765 3.592 2.781.625 2.976.112 2.476.101. Demand.108.8 21.894.003.8 22.326.687.020 2.979 3.429 2.979 2.218 3.9 29.499 2. Inventory.140.4 21.250.613 3.498.3 24.773.5 25.900.564 2.510 3.022.609.897 2.709 2.904.283.9 30.315 2.798.823.193 3.441.2 23.509 3.206.666.833 2.933 3.469 4.2 23.256 2.097 2.647.316.7 28.8 MJ ERVIN & ASSOCIATES 88 .281 2.323 3.8 27.130 3.458.673 2.4 21.646 2.2 22.142.251.2 27.743 2.5 27.589 3.209.886 3.970.587.968 3.859 2.7 29.437.1 22.029 2.853 2.291.897 3.7 31.268 2.242 2.345.366 2.411.677 3.654.083.254.839 2.709 2.120.4 25.744.9 19.095.4 24.3 Canada Avg RUL Rack Price (¢/l) 35.970.455.818.427.998.733 2.642.735.193 3.073 2.661 Canada Avg ex tax RUL pump price (¢/l) 39.286.1 23.802 2.801.958.255 3.3 22.801.301.502 2.045 2.9 21.202 3.710.544 3.180.335 2.7 29.518.810.930.884 2.141 3.456 2.254.0 28.269 2.297 2.254 2.720 3.566.4 31.725.056 3.600.7 34.619 2.089.321.813 2.9 23.299.262.612 3.651 2.9 31.130 3.015 3.179 3.192.6 26.841 2.051 3.329 3.377.822.871 2.973.1 23.9 22.3 23.462.182 3.235 3.9 23.8 33.298 2.558.422.661 Canadian Domestic Gasoline Sales (M3) 2.480.843.748.5 31.075.931 3.960.558.287 2.026 2.7 18.827 3.490 3.935 3.3 26.748 2.030.035 2.938.285 2.152 2.703 2.7 26.771 3.313 2.501.300.270 3.669.450 2.461 3.1 21.132.232 3.437.081.889 3.3 22.369.5 32.667 2.853 3.Table C: Canadian Supply.331 2.6 21.199 2.218.580 3.8 26.201.952.970 3.102.160 3.1 16.7 24.070 3.2 26.070.869 2.168 2.479 2.5 19.381 2.311 3.9 26.263.9 26.714.636.7 21.621.880 Canadian Retail Gasoline Sales (M3) 2.338 3.2 26.287 2.176 2.181.379.039.565.141.180 3.457 2.626.019.672.301 2.301.416 2.2 27.941 2.840.0 24.430.180 2.969 2.011 2.

264 2.617 2.148.9 27.082.1 21.149.857.4 26.055 2.198.5 25.840 2.205 2.170 3.469.539.179.195.123.415 2.994 3.6 20.336.9 22.037 3.785.324. demand.714 2.881.048.692.614.7 Canada Avg RUL Rack Price (¢/l) 20.198.Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 3.906.965.999 3.426.6 20.315.294 3.669 2.442 2.940 2.141 2.871 3.8 28.483. inventory) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 89 .214 2.320 3.863.7 19.386 3.1 24.660 3.7 22.155 2.864 2.638 2.4 25.658.566 3.363.505 2.516 3.904.648 3.537.649.264 2.620.830 3.222 2.344 3.5 21.703 3.165.601 3.667 Canadian Domestic Gasoline Sales (M3) 3.919 2.480 2.593.806.671.184.936 3.986.797.414 3.0 25.097.977.8 24.261.970.984 3.2 26.555.2 25.382.077.679.796.112 3.324 2.068.005 2.928 3.606.2 25.317 2.0 25.9 29.5 21.7 21.597 2.649.607.219 Canada Avg ex tax RUL pump price (¢/l) 27.8 21.656 3.386 3.0 26.182.930.889.8 25.204.346 2.376.717.0 26.799 2.4 20.370.0 24.006 3.519.644 3.130 3.467 2.390.825.198 2.8 20.074.675 2.338 2.250.997 2.4 26.5 source: Statistics Canada (production.170 Canadian Retail Gasoline Sales (M3) 2.244 3.753 3.773.791 3.961.521 2.

6 59.6 54.Study Markets RUL Pump Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Victoria 54.7 54.6 48.3 55.4 53.4 56.9 56.3 61.5 54.9 51.6 53.0 61.1 44.2 54.3 42.9 59.5 59.4 55.5 58.8 53.7 44.5 50.5 53.5 57.2 65.6 47.9 59.1 49.2 58.9 53.6 44.6 53.6 50.4 52.2 54.8 52.8 56.1 43.0 61.2 61.9 61.8 59.9 56.5 59.5 59.5 61.4 50.5 60.5 55.5 58.8 55.3 51.9 56.8 56.4 56.8 48.9 61.7 53.0 52.5 58.5 60.9 55.6 46.7 54.7 52.9 53.8 52.5 56.5 57.9 53.6 56.9 56.8 51.9 50.7 48.5 57.4 53.3 62.4 52.4 57.5 58.9 53.Table D: Pump Price History .5 58.9 58.9 44.8 56.5 53.1 55.8 57.6 48.2 50.9 54.9 52.8 49.5 51.6 58.3 50.1 55.9 62.2 63.9 56.6 62.4 55.1 49.4 58.5 58.7 53.5 59.0 39.9 52.0 61.7 65.0 48.9 56.9 55.5 56.5 52.9 64.4 52.0 44.4 Winnipeg 49.9 52.2 48.0 46.9 57.2 62.2 50.2 62.5 62.4 59.8 50.9 56.7 62.6 52.5 55.9 56.9 53.2 62.0 59.0 61.9 55.9 64.2 43.5 61.1 44.9 64.4 55.9 61.9 53.9 52.4 52.8 64.5 57.9 61.7 White Rock Calgary 45.2 56.9 58.3 55.5 57.9 52.9 49.9 46.8 56.8 53.9 63.6 47.1 56.6 55.7 52.6 55.5 56.7 49.5 56.8 54.2 57.1 55.5 47.5 47.8 48.4 48.5 56.5 60.2 51.9 54.8 48.2 62.6 50.5 57.5 51.7 45.9 45.4 56.7 65.8 48.9 51.7 62.8 41.9 44.4 61.0 59.9 47.6 47.6 46.9 54.2 62.0 61.9 54.0 57.5 58.3 52.4 65.3 56.5 51.9 49.7 50.8 44.5 51.9 53.8 59.9 55.5 58.4 46.5 57.4 54.9 54.2 59.9 51.9 47.3 59.7 45.9 56.8 47.9 54.9 51.5 45.7 51.9 52.3 52.1 50.5 52.8 53.7 53.9 49.8 57.2 47.4 58.9 58.5 46.5 58.6 58.9 56.1 52.2 46.3 52.6 48.5 Vancouver 53.0 55.9 64.2 46.8 52.2 62.5 45.4 57.3 52.5 59.5 57.4 46.5 60.4 56.4 61.0 62.7 65.5 58.2 51.5 49.4 56.3 48.9 62.4 54.6 54.1 53.8 53.7 54.8 45.4 55.1 60.5 53.7 51.7 65.2 62.3 54.0 61.4 56.2 50.9 64.9 53.5 57.5 57.3 49.9 52.9 57.0 62.7 63.5 59.2 62.7 57.0 50.5 59.9 47.5 57.3 49.8 52.8 Thompson 59.5 60.1 53.4 63.7 46.1 49.7 65.5 59.9 54.2 54.4 55.2 46.2 55.0 Sioux Lookout 62.5 59.9 56.5 57.5 51.0 62.5 57.4 47.7 50.8 50.8 56.4 49.0 58.1 52.9 53.3 48.4 46.1 41.2 62.9 48.1 50.7 48.9 47.5 60.3 50.4 54.8 52.9 58.0 52.5 58.1 59.9 MJ ERVIN & ASSOCIATES 90 .9 61.6 51.4 53.0 54.2 51.9 58.4 55.7 51.5 47.8 56.5 58.6 49.9 53.5 54.3 54.9 53.4 52.2 65.2 Nanton Peace River Regina 49.0 61.9 54.3 52.9 61.8 47.7 57.4 61.

1 52.3 59.7 57.4 54.1 58.4 55.3 55.4 54.7 56.3 53.9 53.3 55.5 53.0 55.6 54.4 57.9 61.6 54.3 54.3 55.8 63.3 59.6 59.1 58.7 56.1 56.9 58.5 64.2 55.7 57.6 52.3 54.6 63.9 58.4 53.9 55.1 54.0 51.2 57.3 49.6 54.7 59.6 61.1 51.4 49.9 54.5 51.9 53.8 54.0 52.9 55.2 57.7 60.6 49.8 54.0 61.1 55.5 67.2 55.6 55.3 56.3 59.0 56.2 52.6 59.7 51.8 49.9 64.0 52.5 52.5 56.6 49.2 57.5 51.7 54.6 54.9 55.2 59.3 57.8 53.7 48.8 52.5 53.9 55.2 56.2 54.2 60.2 50.8 55.7 54.2 56.2 54.6 56.0 53.0 47.8 55.6 58.3 52.8 52.9 64.6 52.9 60.3 51.1 53.8 60.6 52.8 55.8 55.3 53.9 60.3 55.5 57.7 64.4 53.3 54.6 51.6 61.3 54.5 60.9 56.1 55.8 60.9 56.2 56.5 53.7 53.9 61.1 53.4 54.4 45.2 57.1 53.0 54.7 54.2 56.0 56.2 53.4 54.0 55.0 60.2 49.0 57.1 60.6 50.0 50.8 50.2 59.3 53.7 57.5 56.9 56.5 56.7 56.2 Chicoutimi Gaspé Saint John 60.5 Ottawa 58.9 49.1 51.0 60.0 53.2 57.7 56.2 51.2 57.6 53.8 47.6 51.6 59.4 51.Study Markets (cont’d) RUL Pump SS Marie Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 52.3 60.0 61.2 56.7 58.2 61.9 52.9 49.0 55.6 52.6 54.5 56.8 49.9 51.5 59.2 51.3 56.1 57.9 55.5 54.2 54.2 58.8 Halifax Charlottetown 60.1 49.6 60.Table D: Pump Price History .6 52.0 54.9 49.5 54.5 54.3 55.8 55.7 54.0 52.9 57.7 52.0 57.4 53.6 55.6 54.2 55.5 52.6 63.6 55.7 56.2 Montreal 63.6 52.8 55.3 56.5 59.9 50.5 64.8 56.7 57.1 56.4 54.0 52.8 57.1 61.4 58.7 52.1 52.5 57.5 63.3 58.3 61.4 57.2 53.3 49.2 61.7 53.5 61.6 55.3 56.0 53.5 53.0 55.4 52.7 57.5 61.6 63.5 57.9 62.6 53.2 55.5 55.1 57.4 55.9 61.7 56.0 50.5 60.0 56.7 58.2 49.1 60.4 58.4 52.2 58.8 53.6 53.5 MJ ERVIN & ASSOCIATES 91 .7 48.1 59.3 54.6 Canada Avg 55.9 55.9 61.5 51.9 55.8 56.0 58.1 55.4 51.2 54.6 51.0 51.2 54.1 59.7 50.9 57.3 62.3 54.6 56.7 46.3 56.6 55.4 58.8 57.2 55.2 49.7 44.0 55.9 55.2 53.3 52.7 51.1 48.4 54.5 54.8 50.1 52.1 54.0 54.5 57.6 50.0 55.0 48.8 53.8 54.8 59.5 51.0 59.5 59.5 58.3 54.9 49.2 49.3 54.1 57.1 56.3 53.7 49.2 61.1 53.1 55.8 50.2 57.4 57.1 54.9 57.1 Toronto 52.7 55.2 57.7 51.1 61.2 57.3 54.1 58.4 57.2 60.6 56.0 57.5 54.9 64.0 54.3 52.3 52.5 48.9 53.5 56.5 57.8 61.6 58.6 52.0 50.2 56.6 58.2 52.0 48.6 56.4 57.0 49.7 54.3 55.4 54.1 55.9 55.6 57.2 58.9 60.1 54.3 59.8 55.4 58.1 55.9 57.9 53.0 60.1 53.8 55.7 54.4 54.7 51.7 59.2 55.9 55.4 58.4 60.1 61.5 55.4 58.6 54.6 53.4 57.2 51.6 55.0 59.9 61.9 54.6 55.0 47.4 53.6 58.4 51.2 56.5 63.7 52.0 52.2 57.5 61.9 53.6 50.0 60.5 63.5 55.8 54.5 52.9 63.9 54.1 51.9 56.0 57.1 58.1 54.0 59.8 51.3 53.4 50.2 52.0 52.6 58.2 56.8 57.7 47.5 52.5 54.1 54.5 54.8 61.

9 28.4 21.3 26.4 30.7 30.8 31.9 27.3 29.4 23.3 30.0 28.5 29.3 26.4 Jun-95 30.9 29.1 25.9 27.9 26.4 28.5 27.9 24.0 24.4 30.Study Markets RUL Extax Victoria extax Vancouver ex Calgary extax tax 32.7 24.0 25.7 25.3 May-94 28.0 May-92 28.7 28.6 29.1 24.1 22.3 27.7 27.7 29.9 21.6 22.5 27.2 29.8 27.2 28.3 Dec-95 Edmonton Regina extax extax 27.4 Dec-92 31.1 Apr-94 29.1 27.3 28.4 20.3 29.6 30.4 29.4 31.3 24.9 23.6 21.3 Feb-95 26.0 32.4 20.7 29.6 26.7 29.0 22.7 27.7 26.3 23.9 24.6 27.3 30.7 26.9 31.5 24.2 25.5 21.9 26.9 30.2 Apr-93 28.0 23.0 27.6 29.2 26.6 26.3 29.0 Apr-92 30.2 24.7 Aug-92 24.0 23.4 22.8 27.5 29.5 Oct-92 30.8 26.6 Aug-95 30.6 28.3 Jan-93 30.8 25.9 Oct-94 32.4 29.3 21.3 29.8 26.4 24.7 30.5 27.2 28.9 Aug-93 30.1 26.3 28.7 Mar-94 28.8 22.8 Jan-94 25.6 30.2 28.0 23.5 Jul-95 30.6 May-95 29.3 28.4 28.0 31.4 23.7 28.8 27.2 22.6 24.8 28.6 29.9 20.1 25.1 24.4 31.8 27.5 Oct-95 30.6 28.5 Feb-92 28.5 29.9 25.6 26.5 Jul-94 29.4 22.1 19.4 31.1 30.9 24.0 24.9 29.3 29.0 Jun-93 26.0 26.5 24.8 27.6 Jun-92 32.1 22.4 Mar-92 28.1 Apr-95 30.9 30.6 27.3 27.4 25.2 26.2 23.6 25.0 May-93 29.4 25.6 27.3 26.6 22.7 Jan-92 31.4 MJ ERVIN & ASSOCIATES 92 .9 25.9 25.1 28.2 27.9 21.5 24.8 Toronto extax 26.8 24.8 27.8 24.8 29.1 27.8 26.5 23.4 27.2 27.5 29.8 23.8 28.4 27.3 30.2 Jun-94 31.3 29.3 24.8 26.1 25.7 Sep-95 30.4 30.2 25.7 28.8 28.6 26.6 27.4 22.5 Aug-94 28.4 26.4 27.7 28.3 28.7 26.6 Mar-93 28.0 26.0 25.9 24.4 24.3 29.3 29.2 24.6 23.4 27.9 Jul-93 28.5 28.4 27.7 28.0 26.0 23.6 23.4 30.9 26.1 25.4 23.9 28.6 26.8 25.4 28.4 31.8 24.9 29.9 25.1 Feb-93 29.6 25.6 Sep-93 28.5 26.1 Mar-95 29.0 21.9 24.0 Oct-93 28.5 25.0 27.4 31.1 31.7 Jan-95 27.5 29.7 28.4 29.9 30.4 29.8 29.0 25.2 29.2 Dec-94 26.0 23.3 26.9 27.1 20.2 Nov-92 31.0 31.8 Dec-93 26.2 24.6 26.3 31.1 23.7 26.3 24.6 24.4 25.2 Nov-93 27.8 25.9 27.2 32.3 26.5 26.8 Feb-94 24.0 29.4 25.3 29.7 Winnipeg extax 27.7 30.6 23.1 24.4 20.9 23.2 Nov-94 29.2 28.5 Nov-95 30.3 Jul-92 31.4 31.3 23.7 Sep-94 32.5 27.2 26.9 28.4 29.Table E: Ex-tax Pump Price History .7 29.2 24.5 Sep-92 29.9 26.8 29.4 29.1 26.0 24.7 30.3 29.7 30.6 23.8 29.3 33.6 30.3 28.3 30.4 25.6 26.1 31.4 29.9 25.2 26.7 24.6 26.5 21.5 23.9 28.1 28.7 31.4 31.5 27.6 29.3 32.1 30.8 24.8 21.

8 26.7 23.2 28.4 25.4 27.2 27.0 34.3 27.9 32.1 30.0 23.1 26.2 33.0 33.8 26.6 32.4 21.3 31.7 24.2 25.2 21.3 29.5 27.5 26.7 26.3 29.1 30.1 32.Table E: Ex-tax Pump Price History .9 26.1 32.5 34.2 24.9 26.7 26.5 24.4 33.9 28.6 34.2 32.1 34.9 30.9 30.7 27.9 32.5 25.6 31.4 28.5 28.8 33.8 29.9 35.8 29.4 25.3 31.2 27.7 34.8 29.6 28.2 27.1 22.6 27.3 29.4 24.0 28.8 28.5 28.9 37.6 36.3 25.7 32.3 22.3 25.5 25.3 31.2 27.8 32.7 34.7 27.9 29.1 29.0 33.8 28.9 33.3 28.4 26.0 34.3 29.4 36.3 24.7 23.7 26.7 24.4 25.2 28.1 32.0 30.0 25.7 29.6 32.9 29.7 27.0 32.2 22.0 25.5 30.8 23.1 29.9 32.1 24.8 32.5 33.4 34.9 33.9 29.3 26.0 33.8 25.7 30.8 30.1 25.5 26.1 31.5 27.0 33.6 36.7 30.0 29.3 31.9 31.3 28.8 26.0 36.2 27.6 Charlottetown extax 36.5 31.2 27.0 28.1 32.2 27.5 29.1 28.9 30.8 27.0 29.5 25.6 33.7 32.2 33.6 24.8 28.9 29.1 34.9 27.9 27.5 30.2 26.1 29.2 29.3 27.7 25.5 25.7 26.6 26.9 26.9 29.9 29.6 23.8 36.5 36.3 28.0 34.2 34.0 25.7 32.2 22.8 26.8 27.5 28.8 23.4 31.5 33.4 26.2 22.5 31.4 32.2 26.0 28.9 29.9 32.7 28.2 27.4 31.2 Saint John Halifax extax extax 34.2 36.1 34.6 29.2 22.8 30.1 24.6 25.2 32.9 28.2 32.4 33.7 24.8 27.6 28.4 33.9 27.6 32.4 33.1 24.8 32.2 30.8 25.7 22.8 28.2 24.5 28.0 28.6 34.8 25.0 27.3 33.1 28.4 36.1 26.0 26.8 23.6 28.6 26.4 28.8 23.2 25.7 33.3 23.2 26.5 32.8 30.2 23.8 29.3 29.9 23.7 24.2 36.0 36.3 26.9 30.2 25.9 24.9 30.3 28.3 31.0 33.3 35.8 33.3 25.2 28.5 25.0 32.6 29.5 24.6 32.4 32.0 28.1 30.2 27.3 34.6 26.4 25.7 28.6 26.6 28.2 26.7 24.5 27.7 23.8 29.7 29.4 31.8 Canada Avg extax 29.0 29.7 MJ ERVIN & ASSOCIATES 93 .3 34.5 33.8 28.8 25.4 32.7 27.1 23.8 32.0 26.5 27.8 24.7 Quebec extax 32.4 33.9 27.8 28.1 Montreal extax 31.0 30.3 25.6 27.Study Markets (cont’d) RUL extax Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Ottawa extax 31.2 25.6 25.8 26.7 28.0 26.4 26.1 24.9 31.4 24.0 23.3 30.3 28.2 26.5 25.6 32.3 26.6 31.3 34.2 30.4 22.6 27.7 26.6 22.6 33.6 23.7 26.7 28.8 27.9 27.6 28.5 30.0 31.2 30.7 28.

4 22.4 22.6 20.2 21.3 18.3 20.8 22.5 22.1 20.2 20.4 22.2 21.3 18.8 18.1 21.1 18.0 23.1 22.3 20.5 21.0 21.2 Quebec city Montreal rack Toronto rack rack 19.8 20.3 17.1 23.2 19.4 22.6 25.8 18.3 23.7 22.5 21.8 24.3 22.2 18.1 21.8 27.2 18.8 23.0 23.9 21.7 19.2 22.5 23.6 18.6 23.2 20.0 21.4 17.5 21.3 19.0 21.5 20.6 21.0 19.8 20.5 22.5 23.1 20.9 21.5 17.4 18.7 21.5 20.4 21.9 24.8 20.1 22.1 21.Study Markets RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Saint John NB rack 21.1 21.3 20.9 19.2 22.6 25.8 19.1 Halifax rack 20.8 21.5 17.3 24.4 21.4 21.2 17.1 21.9 22.7 22.6 25.8 23.0 23.5 24.9 18.6 23.8 23.7 21.4 21.3 23.5 19.1 21.2 19.0 19.2 16.3 18.0 22.Table F: Rack Prices .6 19.8 21.0 21.5 21.8 25.5 21.2 16.4 20.3 23.6 20.2 20.5 23.6 20.5 21.5 22.2 23.4 19.7 20.7 21.0 22.8 23.2 18.2 18.5 22.9 20.0 23.9 20.3 19.4 23.1 22.4 20.9 22.6 23.1 20.8 18.0 20.1 22.0 23.6 19.4 21.3 21.2 18.0 20.4 21.9 23.4 22.2 23.9 18.4 20.7 23.6 20.7 17.8 23.0 21.6 20.1 19.8 18.2 23.8 22.8 Ottawa rack Thunder Bay rack 20.0 22.4 15.3 21.1 22.3 19.2 21.0 22.7 17.5 21.2 20.4 21.6 23.4 23.4 22.3 21.8 22.7 21.2 20.8 20.5 27.4 22.5 22.8 19.7 21.5 24.2 21.7 22.1 23.9 23.1 15.3 23.2 16.9 17.9 18.0 23.8 20.3 26.0 21.8 21.1 19.8 21.1 22.7 22.6 19.7 18.0 23.7 16.9 21.2 21.5 22.8 22.5 20.7 17.1 20.0 19.3 22.8 21.6 23.8 19.1 15.2 29.1 21.3 17.4 22.2 21.4 21.4 21.3 21.9 21.9 18.8 21.9 22.4 21.5 18.9 20.7 22.1 20.3 23.4 23.3 19.2 22.8 23.9 25.7 20.0 22.5 24.3 23.7 20.7 22.3 17.9 22.5 17.9 21.0 23.6 19.3 24.2 23.2 19.4 21.9 22.7 MJ ERVIN & ASSOCIATES 94 .1 20.9 22.5 21.5 20.1 20.6 19.2 21.4 24.8 22.5 26.4 22.8 23.5 19.1 23.8 19.2 20.3 22.1 22.6 22.9 22.6 23.6 20.5 18.1 24.3 23.7 22.3 21.4 21.6 21.7 21.6 19.2 21.7 18.7 22.0 21.1 21.0 24.3 22.7 21.9 21.7 22.7 19.8 20.1 16.4 22.4 20.6 20.4 21.4 20.4 22.1 20.1 19.7 23.3 20.0 22.4 23.

6 25.5 24.2 22.8 19.3 23.9 21.8 22.3 24.4 19.3 17.7 21.2 23.4 21.9 22.3 22.6 23.7 24.2 21.2 21.4 20.8 24.7 22.4 24.9 21.9 23.7 25.1 21.2 20.2 21.0 23.2 22.4 23.7 21.7 22.0 22.3 24.0 21.6 23.2 20.2 24.9 19.8 23.6 20.8 21.5 21.0 23.7 22.2 23.4 23.3 20.4 24.5 19.6 21.Study Markets (cont’d) RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Winnipeg Regina rack Calgary rack rack 24.7 21.0 22.1 19.7 21.5 17.0 21.7 21.5 24.8 20.1 21.9 19.6 21.6 19.0 23.0 22.5 21.7 21.5 23.2 19.3 18.9 22.5 MJ ERVIN & ASSOCIATES 95 .1 19.6 20.1 18.4 24.3 23.6 21.9 23.0 24.7 22.9 22.6 23.9 22.1 17.6 21.8 22.0 18.8 23.5 21.2 22.7 21.5 21.8 24.8 20.7 17.5 22.6 22.1 22.1 22.7 23.9 22.2 21.3 23.7 20.5 24.1 20.9 20.9 19.9 21.5 22.5 23.0 22.7 22.4 21.8 22.0 17.9 21.1 21.5 21.8 20.6 23.2 22.6 25.0 22.3 19.6 22.4 21.0 21.5 23.7 22.0 18.5 19.4 21.7 22.1 21.6 24.5 22.8 23.4 21.8 23.4 20.0 22.9 23.4 21.6 20.3 20.9 21.6 23.2 24.9 19.1 20.8 18.2 23.7 23.4 25.3 22.7 24.7 21.2 22.6 21.8 24.2 24.8 21.2 23.3 21.3 19.4 22.7 21.5 20.6 23.8 21.7 23.1 24.7 22.2 22.3 23.2 24.4 18.6 24.7 23.9 24.2 21.2 23.5 22.9 21.9 22.1 18.7 22.1 16.5 21.9 22.5 18.0 22.9 22.6 21.5 19.1 25.3 20.4 22.3 17.7 23.8 Vancouver Victoria rack rack 24.8 22.1 25.7 21.6 23.9 23.6 21.0 20.5 20.1 16.0 23.1 23.Table F: Rack Prices .0 20.1 23.0 24.6 21.5 22.1 21.2 23.9 23.1 22.9 21.6 21.5 22.0 21.1 22.5 21.3 24.2 24.5 23.8 22.5 21.3 23.8 20.9 18.8 22.5 20.6 21.1 23.2 Edmonton Rack 23.7 19.0 24.1 22.4 19.4 23.9 20.4 21.1 23.4 21.4 24.1 23.6 17.5 24.2 20.9 19.6 23.2 20.6 22.3 24.9 17.2 20.1 23.9 19.5 20.9 19.1 21.5 18.3 22.1 23.9 24.0 22.7 22.5 21.8 21.1 23.9 21.7 21.5 19.0 21.4 22.5 23.6 20.0 23.4 23.3 21.0 25.5 23.9 20.3 23.2 19.3 17.3 22.6 25.4 22.5 21.6 19.1 23.8 20.3 20.0 20.3 21.5 23.9 21.2 22.1 25.7 24.1 22.0 17.7 18.1 21.9 23.6 22.7 25.9 24.6 17.4 22.9 18.3 23.0 24.1 21.1 23.7 17.7 21.2 22.1 20.2 18.8 25.0 20.5 Canada avg rack 22.9 22.3 21.

500 378.40 63.42 53.412 722.80 64.26 49.933 25.20 61.38 56.000 1.141.000 1.636.30 54.50 56.40 59.905 183.935 758.89 60.702 333.60 60.014 3.72 58.Table G: Study Market Data .894 1.997 397.030.834 71.980 120.327 Average Pump Price (¢/litre) Premium Midgrade Regular Diesel 63.621 102. and All Study Markets are weighted (by market population) averages.628 702.018 2.903 33. Urban.554 2.702.94 55.60 70.790 185.238 2.20 54.40 54.72 74.98 59.30 54.36 54.153 316.268 478.85 54.438 591.23 53.30 66.196 669.30 68.10 53.72 63.597 2.50 55.86 56. MJ ERVIN & ASSOCIATES 96 .97 51.11 58.830 2.678.32 51.377 30.971 473.24 61.796 2.420.483 63.214 248.18 51.65 54.26 44.241 451.298 576.000 217.194.460 833.101 447.85 48.414 450.052 84.448.93 63.250 748.850 126.89 61.26 63.48 56.19 52.543 2.Throughput and Price by Grade 1995 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Average Throughput (Litres) Premium Midgrade Regular 661.23 63.686 273.40 58.30 63.093.07 61.00 57.19 49.60 49.90 62.000 63.837 329.056.173 568.88 54.30 52.895 600.17 Diesel 64.28 65.40 61.13 58.671 399.02 51.810.174.35 73.620.245 351.10 52.625 64.669 203.16 59.87 61.009 54.00 48.120 570.400 142.475 1.983 1.00 62.859 240.334.22 59.78 67.643 184.370 41.90 63.770 2.300 578.30 57.20 60.687 1.00 67.70 49.296 179.204.508 2.211 15.83 68.53 48.145.811 120.102 98.745.614 3.749 91.249.20 59.25 57.246 2.88 64.53 61.483 2.20 58.74 57.832 91.018.704.90 67.55 58.220 389.749 243.119 632.234 799.796 529.97 63.922 103.50 56.516.150 48.66 50.972 429.89 65.192 2.712 1.101 256.92 51.45 63.897 350.60 50.10 59.513 19.113 2.985 636.698 Note: Regional.557.858.00 57.890 2.060.332 101.949 1.058 2.03 58.70 55.73 65.34 63.10 63.945.549 111.45 53.00 66.529 123.166 102.

83 24.50 20.28 23.89 25.43 21.21 27.91 21.95 22.53 23.57 22.63 28.33 21.41 27.73 26.90 27.88 20.45 24.09 24.47 20.63 26.45 20.49 25.49 21.47 28.83 24.31 22.92 21.76 24.33 22.25 31. and All Study Markets are weighted (by market population) averages.59 22.02 23.08 25.04 24.69 23.42 27.07 26.35 25.45 20.43 21.45 23.23 24.32 33.59 22.15 29.92 30.97 25.96 24.97 22.90 26.45 20.99 26.45 25.88 22.40 25.81 27.16 21.49 31.87 26.74 21.94 23.75 27.45 22.98 25.65 26.55 28.96 24.27 29.45 20.93 23.Rack Price.45 29.81 28.59 28.23 25.69 27.33 21.48 25.09 27.83 23.01 28.33 22.78 Product taxes Midgrade Regular 26.88 28.54 28.55 28.37 27. MJ ERVIN & ASSOCIATES 97 .15 20.42 24.75 22.20 20.01 22.65 27.43 28.39 22.89 29.18 28.39 Note: Regional.51 20.57 29.45 24.83 24.88 20.83 25.08 23.43 20.32 21.25 24.42 24.43 20.26 28.16 22.45 28.93 23.89 28.38 24.73 32.84 28.03 20.63 24.41 22.04 26.39 21.51 25.20 27.34 26. Urban.63 21.13 23.83 22.84 28.81 25.07 24.42 25.65 21. Tax (by Grade) Rack Pt.82 21.95 22.59 28.89 26.11 26.38 24.92 22.21 27.36 26.59 28.27 20.85 28.50 25.96 22.03 21.15 24.28 22.23 26.30 29.99 28.47 27.64 28.39 21. Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Victoria Vancouver Vancouver Calgary Regina Winnipeg Calgary Edmonton Winnipeg Toronto Ottawa Toronto Winnipeg Montreal Quebec Montreal Saint John Halifax Halifax 1995 Average Rack Price (¢/litre) Premium Midgrade Regular Diesel 26.34 20.39 22.25 27.95 25.18 25.33 22.56 22.58 25.23 23.98 28.26 27.03 24.63 25.68 Diesel 36.51 25.81 21.07 24.16 29.82 28.92 20.07 26.76 25.17 20.15 27.88 28.63 20.Table H: Study Market Data .88 22.25 28.07 24.51 31.97 23.49 21.33 21.33 21.06 28.33 27.36 24.34 25.95 Premium 26.59 24.93 27.33 21.45 29.40 27.

38 7.85 21.03 28.22 5.15 66.50 3.52 5.54 50.68 7.31 34.38 22.04 0.97 0.91 0.00 0.23 7.85 11.84 5.57 12.45 6.59 4.16 54.33 .26 27.27 60.00 58.79 33.89 28.27 6.49 57.29 8.02 0.50 0.43 0.83 1.05 6.03 7.37 26.91 29.58 1.19 5.04 22.02 3.56 4.47 58.12 23.58 66.06 0.08 55.84 28.30 12.68 2.73 2.22 1.78 2.52 30.24 23.41 7.41 12.24 7.13 28.77 5.17 1.02 13.25 1.27 11.17 9.12 6.28 1.77 30.01 0.32 31.53 22. Variance uses the formula [n∑x2 .96 3.71 33.20 14.85 24.35 58.00 22.44 56.17 26.64 3.14 7.56 24.13 0.98 0.53 6.27 62.29 24.31 0.88 31.36 0.33 9.18 55.34 0.28 27.93 56.00 4.21 8.30 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Variance Avg Deviation Group B Variance Avg Deviation All Study Mkts Variance Avg Deviation 57.94 17.72 26.83 21. Average Deviation is the average deviation of the market values from their mean (average) value.96 25.36 20.Blended Prices.16 20.91 2.60 23.08 17.17 11.85 26.38 2.70 22.31 28.73 10.35 27.04 23.83 36. Margin Cents per Litre 95 Blended Pump Price 95 Blended tax 95 Blended Extax Price 95 Blended Rack Price 95 Retail Freight Cost Gross Marketing Margin 6.80 9.75 28.83 12.43 23.60 7.77 37.63 58.90 23.51 11.44 33.07 0.93 22.73 1.30 5.94 22.06 5.80 1.86 49.50 58.90 59.82 32.11 26.34 1.14 60.42 2.45 1.98 0.98 31.23 38.88 5.21 8.41 29.64 3.08 0. MJ ERVIN & ASSOCIATES 98 .35 28.01 31.07 0.10 3.86 28.28 1.62 56.24 7.(∑x)2 ]/n2. and All Study Markets are weighted (by market population) averages.26 5.64 1.06 28.18 7.47 0.95 6.033 0.79 0.31 23.99 0.20 5.91 22.76 5.81 26.53 21.89 21.66 28.13 11.83 27.95 21.75 23. Costs.82 95 Retail Gross Product Margin 6.38 28.60 14.96 27.92 22.63 60.68 7.04 28.94 Note: Regional.48 7. Urban.26 3.98 1.39 56.10 6.07 30.38 0.21 24.64 2.08 3.44 25.22 14.49 2.Table J: Study Market Data .28 56.81 28.89 0.16 3.50 10.29 7.96 28.02 22.82 3.99 2.18 21.11 31.73 22.35 60.

Outlet Costs.520 5.272 $ 210.779 $ 121.129 $ 97. but for ancillary revenue.465.250.542. these averages are based on all applicable study markets.332) $ (238.224 $ 189.011.837 $ 56. MJ ERVIN & ASSOCIATES 99 .622 $ 174.095. and All Study Markets are weighted (by market population) averages.948 3.658.623 2.279 $ 154.223.640 4.295 $ 174.632 $ 256.010 1.246 $ 118.289 981.993 $ 113.719 3.852) $ 119.Sales.707 $ 260.000 2.058.780 $ 85.014.023 $ (15.217 2.071.247 4.911) $ (166.144 2.135 $ 199.098 $ (320.604.074 $ 131.102 $ 223.677 $ 180.875 $ 255.209 $ 26.197.098.000 $ 156.900 $ 179. Revenue. and consolidated outlet income these averages are based only on those markets with available data.067 $ 92.066 3.550 694.120 $ 54.890.157.871) $ (128.716 Note: Regional.367) $ (164.934 3. Urban.646) $ (98. outlet costs.429 $ 238.750 $ 271.542 $ 222.550 $ 177.694 3.263 $ 60.032 $ 77.688 $ 85.004.209 $ 82.265.478 4.966 3.526 $ 207.827.Table K: Study Market Data .885.241) $ (227.794 3.630 3.117 $ 207.805.467 $ 96.557) $ 102.272 $ 118.302 $ 69.116 Outlet costs 95 Consolidated Retail Outlet Income $ 126.746 $ (374.772.956) $ 200.502 $ (80) $ 60.481 $ 96.081 $ 222.800 $ 225.638 2.375) $ (49.866) $ (244.544 $ 175.564 $ 252.000) $ (241.900 2. Income Average Outlet Sales (litres) Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts 3.913 $ 139.068 3.244 95 net retail Ancillary Revenue petroleum revenue $ 208.995 $ 234.013 $ 227. For 95 net retail petroleum revenue.766) $ (274.510 $ 60.394.089.856 3.208) $ (226.855 $ 278.648 3.143) $ (249.626 $ 81.572) $ (286.

22 0.275.098 4.13 2 11.29 1.73 5 10.52 13 5.715 14.06 1 5.98 6.73 14.775.395 rank 8 3 14 4 9 6 19 17 16 1 5 11 18 2 10 13 12 7 15 No.45 14.250 981 2. 106 446 8 313 86 261 5 8 6 546 209 24 3 866 97 8 56 113 23 rank 8 3 14 4 10 5 18 14 17 2 6 12 19 1 9 14 11 7 13 No.000 pop’n No.095 3.23 6 7.745 16.550 1.40 1 3.28 17.88 12 7.00 11.41 0.604 3.48 7 7.08 4 2.775 678.06 5.91 12.41 1.88 11 8.157 2.54 6 2.89 2 4.60 3.675 179.890 rank 9 4 5 3 10 8 15 13 16 1 2 6 19 7 12 18 14 11 17 ¢/l 6.08 16 3.51 9 11. 12 18 4 27 15 17 4 6 5 30 19 10 3 32 14 6 9 9 5 Freight ¢/l 0.542.605 16.04 15 4.975 2. of Brands No.658 3.40 9 4. of Outlets No.400 74.071 2.14 rank* 10 9 12 3 1 2 10 16 17 7 6 15 18 7 13 19 4 4 14 rank 9 5 17 3 7 6 17 13 15 2 4 10 19 1 8 13 11 11 15 Est Outlets / 10.004 3.43 12.76 18 5.95 3 9.89 7.29 8 7.Table L: Study Market Data .47 7.870 120.089 3.058 1.790 1.06 16 4.33 0.80 10 4.30 1.21 0.45 0.265 2.223 3.10 3.827 3.38 0. inverse ranking is used (lowest value = 1).94 18 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Avg Volume per Outlet Marketing Margin 000's litres 3.90 13 4.180 616.91 17 4.50 3 10.60 11 7.96 5.55 19 11.394 2.970 330.02 0.01 7 2.20 0.27 1.27 0.36 5. rank* 3.014 5.47 14 3.84 12 5.23 8 31. N refers to study sample size (total = 481).79 6.145 81. MJ ERVIN & ASSOCIATES 100 .17 19 9.42 5 14.315 710.22 3.08 3.85 15 11.68 4 7.03 14 N= 26 37 5 69 30 61 2 4 4 59 39 12 2 74 16 2 17 18 4 Note: Where an * appears after “rank”.475 3.53 10 6.98 7.24 0.50 8.585 6.30 0.310 1.465 694 3.17 rank* 7 9 9 6 8 11 3 16 17 1 4 12 18 2 15 19 13 5 14 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Gross Product Margin ¢/l rank* 6.20 17 14.50 9.845 15.Demographic Profiles Population pop’n 299 .97 8.

generate jobs and growth. Petroleum Products Address: 235 Queen Street.com Natural Resources Canada Natural Resources Canada is a key information resource on the matter of petroleum prices. accessible through a public fax-back dial-in system. safety and business issues. K1P 5H9 Phone (613) 232-3709 Fax: (613) 236-4280 Industry Canada Industry Canada is the primary overseer of the Sector Competitiveness Framework (SCF). T2N 1Z6 Phone: (403) 283-8704Fax: (403) 283-9104e-mail: mervin@cadvision. Ervin. Contact: Brendan Hawley. They work with major oil companies in benchmarking performance in the retail. and in doing so. The SCF is the basis for this study. Ottawa ON. and provide background resources to industry public affairs managers and the media. K1A 0H5 Phone (613) 941-6219 Fax: (613) 941-2463 MJ Ervin & Associates / Q1 Solutions Inc. a series of studies whose goal is to strengthen Canada’s competitiveness. MJ Ervin & Associates is a Calgary-based consulting organization specializing in the downstream petroleum industry. Vice President Public Affairs Address: 275 Slater Street. Senior Advisor.14th Street NW Calgary AB. cardlock. Ottawa ON. Contact: Michael J.III Sources of Information about the Downstream Petroleum Industry Canadian Petroleum Products Institute (CPPI) The CPPI is a national association of petroleum refining and marketing companies which serves as the voice of the petroleum products industry in Canada on environment. bulk. They maintain a large database of historical prices at most major centres. K1A 0E4 Phone: (613) 992-1477 Fax: (613) 992-0614 MJ ERVIN & ASSOCIATES 101 . 119 . aviation and lubricants marketing channels. Contact: Maureen Monaghan Address: 580 Booth Street. health. Principal Address: #400. Ottawa ON. Contact: Cindy Christopher.

Its monthly publication “Refined Petroleum Products” (cat. Ottawa ON. It reports industry marketing trends and compiles an annual survey of retail and wholesale outlet representation.Octane Magazine Octane is Canada’s refining and marketing trade journal. Managing Editor Address: Suite 2450. Calgary AB.ab. SW Calgary. Contact: Len Bradley. no 45-004) is a useful source of supply and demand volume data. K1A 0T6 Phone: (613) 951-3562 MJ ERVIN & ASSOCIATES 102 . and is a useful “window” on this industry. Energy Section Address: Statistics Canada.6th Ave. ABT2P 3H2 Phone: (403) 264-6064Fax: (403) 237-6286e-mail: pcomm@pcf. Octane is published quarterly.T2P 3P4 Phone: (403) 266-8700 Fax: (403) 266-6634 Petroleum Communication Foundation (PCF) The PCF is an industry funded. Contact: Gerard O’Connor. 101 .ca Statistics Canada Statistics Canada publishes a variety of petroleum industry performance figures. Supervisor. The PCF is a useful resource for any person or organization wishing to become better informed on general downstream infrastructure and retail gasoline price/competition mechanisms. Contact: Robert Curran. Executive Director Address: 214. non-advocacy organization whose mandate is to increase public awareness of Canada’s oil industry. 311 .6th Avenue.

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